Transform your tax liabilities into working cash – a 1031 exchange can help keep your cash at work in your business.
If you routinely sell equipment, you know the drill; go to the auction, get a good price and write a big check to the IRS. For sellers of depreciated assets, the tax consequences can be staggering, approaching or even exceeding 40 percent of the gain, depending on state and local tax rates.
That’s a lot of cash to fork over, especially when capital is hard to come by. The good news is that there’s a proven, well-established tax strategy that converts those federal and state tax liabilities into immediate operating cash flow. Properly structured 1031 exchanges have helped thousands of businesses like yours save on taxes and take those funds that would normally be lost forever and reinvest them back into their companies.
1031 exchanges, also known as “like-kind exchanges” (LKEs), stem from Section 1031 of the tax code. In brief, this law states that if a property owner structures the sale of a business or investment-use asset (such as heavy equipment, vehicles, etc.) as a 1031 exchange, then reinvests the proceeds into the purchase of like-kind replacement equipment, it can defer recognition of that tax liability indefinitely. (The replacement asset can be either new or used.)
Consider an example. ABC Construction is selling a fully depreciated loader at auction and wants to purchase a new dozer. The loader sells for $90,000. Under normal circumstances, ABC would owe the federal and state taxing authorities roughly $36,000 on the sale, leaving only $54,000 to purchase replacement property. However, if ABC structured the transaction as an LKE, they can apply the entire $90,000 toward the purchase of the new dozer and skip paying the tax bill. By implementing an LKE strategy, ABC is able to keep its cash where it belongs — working in their business.
As it turns out, the government regulations dictating what is “like-kind” to a loader are pretty friendly. The construction equipment category includes everything from post-hole diggers to cranes, from scrapers to backhoes, from asphalt roofing equipment to concrete mixers, and then some. For ABC, the question is simple. Do they keep their cash or hand it over to the IRS?
1031 exchanges represent a powerful tax and cash flow strategy, and if at first they sound too good to be true, consider that LKEs have been an established part of the tax code since 1921, and have been continually tested by federal and state courts. It’s a solid and fairly simple tax strategy enabling American businesses to transform hundreds of millions of dollars of tax liabilities into much-needed operating cash flow.
Purple Wave has partnered with a nationally recognized 1031 LKE provider to offer this important service to its customers. A representative can explain more about 1031 exchanges. Contact us today to discuss how you can keep your money at work in your business. Please use the form below to request more information about 1031 exchanges or call us at 866.608.9283.