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California not only made the right decision, it made the green decision

California allows businesses to continue using 1031 Exchanges. Businesses will be operationally incentivized to go greener faster.

As we reported last week, California has decided to eliminate all the provisions within AB 2640 targeting Like-Kind Exchanges (LKEs) in the state. This is good news, as these provisions were particularly unfriendly to businesses that currently, or will someday, employ qualifying exchangeable assets. In short, the measures would have eliminated the enormous benefits of LKEs in California. From an economic standpoint it makes sense to keep LKEs working for the state as their use allows a very large number of businesses to participate in a virtuous cycle of business transactions. LKEs immediately and efficiently reinvest dollars back into company operations, impacting not just their employees, but the overall health of the marketplace, too.

Given these tough economic times, taking LKEs off the table would have resulted in slower expansion, lost jobs and decreased tax rolls. Additionally, the absence of LKE treatment for older assets would have been harmful to the environment.

The Environmental Protection Agency (EPA) is charged with the oversight of emissions standards in the United States, but it's not the only authority states look to when determining what standards to follow. California's Air Resources Board (CARB) issues more stringent standards and many states choose to follow CARB standards rather than the EPA's. Furthermore, California's large marketplace gives it significant leverage in dealing with automakers, heavy equipment manufacturers and energy utilities. This enormous market leverage allows California to dictate environmental requirements to a wide array of businesses wishing to enter and stay within the state's competitive arena.

As you can imagine, staying competitive and environmentally friendly is expensive, especially in California. In recognition of this, CARB offers a variety of incentives, which include:

  • Grant programs for clean on and off-road vehicles
  • Equipment grant programs
  • State financing programs
  • Emission credit programs

These are all great ideas, but the sale of old, environmentally unfriendly generators, vehicles and other equipment may still trigger a large tax liability. This is why LKEs are so very important, not just from an economic benefit standpoint, but (especially in California) from an environmental benefit standpoint as well. By leveraging state and federal incentives with LKEs, companies can more quickly convert from:

  • Fossil fuels to wind, solar and hydroelectric power
  • Energy inefficient to environmentally friendly infrastructure
  • Fossil fuel vehicles (including autos, heavy equipment, boats) to natural gas, electric, etc.

The bottom line is that environmentally targeted incentives and credits alone cannot overcome the huge capital investments required to meet escalating air standards. California made the right decision to allow businesses to continue using LKEs. In doing so, businesses will be operationally incentivized to go greener much faster, and that's good for both the economy and the environment.