I never thought I'd be in the position of defending the tax system, but ...
Regarding depreciation, I thought there were a few other factors that keep the IRS from arbitrarily deciding how much something lasts:
1) If you sell it, you get to treat it as having depreciated to that value (assuming arms-length and all), not the scheduled one.
2) If you can demonstrate a liquid market, can't you use that as the current value?
Also, for counting 4/5th of servers as income, isn't that mitigated by how you're really paying taxes on the income used to buy the servers? The point of that was to make it so that you're taxed on changes in the book value of your venture.
So if you make $1000 in profit and immediately spend it all on servers, you still made $1000 in taxable profits and that's what you're being taxed on, which you should count the taxes on before buying more capital goods.
I didn't mean to say that taxes are bad. I like civilization, too. I mean, I don't like paying taxes any more than anyone else does, but I prefer living in a state with taxes than in one without. Don't get me wrong; I'm not going to pay more than I have to, but I'm also not going to take risks on things that are maybe legal, and maybe end up with a bunch of debt that can't be cleared by bankruptcy. Student loans and screwing up your taxes. Stay away from both.
In fact, I'm incorporated in California, none of the "I have a condo in vegas" tax dodges so common among people who do corp-to-corp contract work, and most of my labor is done by people paid as employees, you know, paid on W2s, rather than as contractors. I play by the rules to the best of my ability.
>So if you make $1000 in profit and immediately spend it all on servers, you still made $1000 in taxable profits and that's what you're being taxed on, which you should count the taxes on before buying more capital goods.
Assuming it's a capital good that depreciates to near zero (and it's more complicated than that) the depreciation is written off against revenue as a cost, just like payroll. Unlike payroll, it's not all written off at once.
If you stay in business long enough, then yes, nearly all your capital goods are eventually all written off against your revenue.
The problem is that as a growing company, you have to buy shit out of post-tax money at a time when there's a much bigger chance of you being around next year to pay taxes at all if you can write off the whole cost of your depreciating capital purchase up front.
There are also a bunch of small-business loopholes here where you're allowed to write down the whole value all at once, all of which I don't really understand. As you point out, there are also ways of writing off your stuff on schedules different from the official IRS schedule, which I also don't really understand (and I suspect you don't fully understand either) - It's really, really complicated; the IRS doesn't often give you clear guidelines; when they do, it's usually best to follow those guidelines.
Regarding depreciation, I thought there were a few other factors that keep the IRS from arbitrarily deciding how much something lasts:
1) If you sell it, you get to treat it as having depreciated to that value (assuming arms-length and all), not the scheduled one.
2) If you can demonstrate a liquid market, can't you use that as the current value?
Also, for counting 4/5th of servers as income, isn't that mitigated by how you're really paying taxes on the income used to buy the servers? The point of that was to make it so that you're taxed on changes in the book value of your venture.
So if you make $1000 in profit and immediately spend it all on servers, you still made $1000 in taxable profits and that's what you're being taxed on, which you should count the taxes on before buying more capital goods.