I'm not sure that they incinerate the puppets after any given amount of time. I know that the foam begins to break down, causing the puppeteers to refer to the puppets as "toast" because the foam hardens and crumbles like burnt toast.
At this point, I believe some of them are rebuilt from scratch and others are disassembled, either to be used as patterns for the next batch or because of things like the eyebrow mechanism and skins which might be reused for the next round.
I do know that during the crowd scenes at the end of Muppets from Space that a lot of the old Muppet Show puppets were brought out of storage, including the old Link and Strangepork Pigs in Space puppets, Wayne and Wanda and Chickens. They were all falling apart, according to a friend of mine that was on set, but there wasn't time or any reason to rebuild them.
It seems to me that if these puppets had degraded to this point that they'd have been incinerated years ago rather than being in storage, so I have an idea that most Muppets end up finding life in later puppets or end up in storage.
Steve