A 1031 like-kind exchange (LKE) program allows a business to postpone the tax hit on sales of used equipment in anticipation of buying replacement equipment, and each year more business owners seize upon the cash-flow benefits available via a 1031 like-kind exchange strategy, recognizing that reinvesting money into their business beats sending it to the government in the form of unnecessary taxes.
In addition to the fact that more cash in your business is never a bad thing, there are noteworthy ancillary benefits that accompany the adoption of a 1031 like-kind exchange program. Even currently, with the availability of bonus depreciation, LKE program clients retain their LKE program and continue to enjoy benefits beyond the cash-flow.
Streamlined Business Practices
The adoption of a 1031 like-kind exchange program does little to disrupt existing practices for the purchase and sales of business equipment, however questions arise in this process, the answers to which frequently leading to positive outcomes for the business. During implementation, clients question their current business process practices: Why DO we buy our assets that way? Why doesn’t Purchasing receive information about what is currently being sold?
The answers to these questions and others are simple. Companies are BUSY, and if things aren’t broken, they are rarely highlighted for improvement. Personally, I had not checked auto insurance rates for years, choosing instead to trust my insurance advisor. When I finally did check, I ended up saving over 50% on my premium! The same thing happens in businesses as they begin to closely examine potential improvements in the following areas.
Increase Sales Proceeds in the Disposition of Used Equipment
In the trucking industry, the resale value of used trucks has skyrocketed relative to their trade-in value. Savvy trucking company owners have seen a 10% increase in sales proceeds when selling used equipment direct or through a third party such as an auction company. Asking “what if” or “why” presents opportunities to increase the bottom line and update long-standing, outdated practices. The same is true in the heavy equipment, leasing, and car rental industries.
Financing Benefits Intrinsic to 1031 Like-Kind Exchanges
A 1031 like-kind exchange program allows owners of rental car, trucking, and equipment fleets to channel cash proceeds into fleet equity instead of income taxes. In so doing, many of these companies see a substantial financing benefit as lenders prefer to extend more favorable terms to a fleet financed with an 80%-20% LTV (loan-to-value) versus the commonly extended (and higher priced) 100% financing options.
Equipment and Depreciation Tracking Benefits of 1031 Like-Kind Exchanges
It’s surprising how many equipment-intensive companies still have asset-tracking and depreciation calculation challenges, especially those located in multiple states with varying tax rules and regulations. A like-kind exchange program often encompasses a solution that fully automates all of these challenges and shortcomings.
Ongoing Business Consulting Expertise and Support
There are few companies these days that are not engaged in some or all of the following activities:
- Acquiring new lines or business or selling existing lines of business
- Evaluating complex compliance, legal, and tax issues and challenges
- Strategizing best practices to maximize performance and profits
- Tax certainty around existing programs and strategies.
The creation of a like-kind exchange program includes consulting with tax and business experts, and ongoing access to these resources and their respective support and input is a highly-valued benefit of a properly-implemented LKE program.
While cash-flow and the opportunity to invest funds that would otherwise be lost to taxes back into the business are the primary reasons for adopting a 1031 like-kind exchange program, the ancillary benefits discussed above are among the reasons companies keep their LKE programs active.