Reduce Tax Exposure on Heavy Equipment Sales

Steve Chacon's picture

For owners of heavy equipment, replacing or upgrading is a necessity. Newer, faster, more powerful machinery helps expand your capabilities and increase your operating efficiencies, and it allows your crews to operate more safely. For a lot of businesses, this means a trip to your preferred equipment dealer to trade in your old iron for new iron. However, if you’re not exploring all of your options, you could be missing out on the chance to maximize your buying power by reducing your exposure to the taxes associated with such transactions.

Trade-in Treatment

Most equipment owners understand the benefit of trade-in treatment. Instead of selling your old equipment to a third party for cash, you trade the equipment in to the dealer who then applies the value toward the purchase price of new equipment. This approach allows a permanent reduction of the sales tax liability related to the replacement equipment. Trading in equipment is a simple and great value-add for equipment dealers, but how much is the equipment owner truly saving?  Remember that your trade-in simply reduces sales tax, which ranges between 6.5% and 12.7%. The dealer handles all of the paperwork and makes things easy for you. However, this typically comes at the cost of a much lower value assigned to your old equipment than you might get by selling it outright or taking it to auction.

If you decide to sell your equipment on the open market, you’ll still need to consider the income taxes associated with selling depreciated equipment. If the sale of your heavy equipment is done without utilizing the benefit of a properly executed 1031 like-kind exchange, the tax exposure can exceed 40% of the sale price.

Dealer Pass Throughs

Dealers often don’t want trade-in inventory, and owners are frequently unexcited about the price that a dealer has offered for their equipment. In this case, having a qualified intermediary help put together a properly structured dealer pass through can secure trade-in treatment benefits while resolving dealer inventory concerns and addressing your trade-in value concerns. A dealer pass through can also provide you with significant income tax savings when combined with Section 1031 like-kind exchange treatment.

The steps of a dealer pass through typically include:

  • The dealer acquires the equipment from the customer.
  • The dealer immediately consigns the equipment at auction.
  • The auctioneer sells the equipment.
  • The auctioneer relays the sales proceeds to the customer’s qualified intermediary.
  • The qualified intermediary relays the sales proceeds to the dealer.
  • The dealer takes the proceeds and offsets the cost of the new equipment.
  • The customer receives the new equipment AND
    • Receives trade-in treatment.
    • Receives like-kind exchange treatment.

Conclusion

Prior to pulling the trigger on an equipment upgrade, a quick call to Accruit to discuss an effective selling strategy can maximize the amount of cash-flow that you are able to generate from the sale of your old equipment. Taking a few additional easy steps with a dealer pass-through enables you to safely combine trade-in treatment with like-kind exchange benefits and can result in substantial savings for your business.

Contact us today for a free consultation and mazimize the value of your trade-in equipment!

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