LKEs and Bonus Depreciation: a case study

Which is better for the bottom line, LKEs or no LKEs? Well, that's an obvious one. Okay, which is better, LKEs or Bonus Depreciation? That's a trick question, because it's not an either/or. However, in an environment where you have have Bonus, you're running 1031 exchanges on some assets, and there's "Bonus hangover" and uncertainty about future tax rates to think about, it helps to take a good look at a real-world case that illustrates how the pieces fit together.

Our Silver State Equipment case study provides just such an example. This large sales and rental dealer buys and sells a large volume of equipment each year, and has devoted considerable time to understanding its cash management and tax deferral options.

Silver State Equipment* (SSE) has, as its primary lines of business, the rental and sale of heavy equipment. With several local branches across Nevada, SSE has been especially successful renting equipment to both commercial and residential builders. Given the high usage rates associated with their rented equipment, they typically upgrade their equipment every three years.

Silver State considered multiple cash and asset management strategies, including LKEs and Bonus Depreciation. The results associated with one of their most common transactions, the sale and repurchase of a track dozer for their rental fleet, illustrates the value of a 1031 exchange program.

Scenario 1: LKE vs. No LKE

In the absence of an LKE program, SSE would realize a tax burden of $18,824 on the sale, leaving only $65,676 to apply toward the purchase of a replacement dozer.** With an approved LKE program, however, the company maintains all proceeds from the original sale to roll forward into the purchase of a replacement asset.

Scenario 2: LKE vs. Bonus Depreciation

Using the same example and assuming that SSE had taken 50% Bonus Depreciation during the first year, we see the impact of the “Bonus Hangover” effect. In the absence of an LKE program, the company has only $58,188 to invest in a replacement asset; however, with an Accruit LKE program in place, SSE has significantly more cash flow to apply to the sale of a new dozer.

For companies like Silver State, Accruit LKE solutions represent powerful cash and asset management propositions. Over the course of a year, Silver State conducts a number of single exchange transactions, affording them ongoing access to hundreds of thousands of dollars in operating cash that they would not have access to otherwise.

* Modeled on an actual Accruit client case.
** Assumes 5-year MACRS depreciation on asset held for three years without bonus depreciation applied during the first year.