[rhino369]

>>They don't have to pay taxes this year because they didn't make money in previous years? How are previous years relevant to this year?

If you don't allow a company to carry forward loses you get a capricious result:

Company A makes $20M in 2019 and $20M in 2020 which is $4.2M dollars tax each year or $8.40M total tax on $40M total earnings.

Company B makes -$30M in 2019 and $70M in 2020 which is 0 year and $14.7M or $14.7M total tax on $40M total earnings.

[TheAdamAndChe]

There's nothing capricious about those results. $70M annual profit should be treated differently than $20M. That was $70M that the company decided not to reinvest.

[ephextom]

Aside from the different handling of capital investment vs expenses, "deciding [not] to reinvest" is not the only factor that determines a company's net income.

Take a company that loses $100M one year because of a natural disaster (like a pandemic), just manages to stay afloat by taking out loans, then makes net income of $50M the following year.

The company has net-lost $50M over two years and incurred large debts, and now has a huge tax obligation on the $50M, before they can start paying their lenders back.

A company in that situation may be better off shutting down, leading to huge job losses for the employees and trading partners, and an overall loss of tax payments that the company could otherwise have generated long into the future.

Your line of argument seems to be that it's always important to get the most possible tax out of a company in any given year, no matter the overall net outcome for society over the long term.

[rhino369]

You only get to deduct expenses, not investments. They could have bought a 70 million dollar piece of farm equipment with that money to reinvest, but they'd only get to deduct a small portion that year.

Regardless, you can't tell based on the data given whether the companies re-invested the money or distributed to shareholders. The difference between those companies could just be whether they booked a $50M sale on Dec. 31 or Jan. 1. Or whether they wrote off a bad asset on Dec. 31 or Jan. 1.

It's totally capricious.

[TheAdamAndChe]

I guess there's something I don't understand here. You're telling me that if a company spends money to invest in itself or improve its infrastructure, that isn't considered an expense? That seems like it would disincentivize investment in company growth.

[ephextom]

Capital expenditure (infrastructure) and operating expenses are treated differently.

An investment in a new factory cannot be deducted as a business expense all at once; it must be depreciated over its useful life, so only a portion of it can be recorded as an operating expense against income for every year it is used.

For software companies it's fuzzy; if you have a team of developers constantly working on enhancements to the company's platform, should the staff wages be counted as expenses or capital investment? It comes down to accountancy technicalities:

https://www.wallstreetprep.com/knowledge/accounting-capitali...