Accruit Blog

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.

Transitioning from coal to green energy technology: implications for Section 1031 of the tax code

Some time back I posted a proposal arguing that Section 1031 of the tax code should be altered to provide oil and gas companies a "one-way swinging door" from fossil to green. In a nutshell, the current tax code allows these companies to sell fossil development assets and defer recognizing the gain on the sale if they then reinvest in a "like-kind" asset. Like-kind, of course, means fossil. The code does not allow O&G companies to use this powerful tool to shift their focus away from fossil and into green technologies.

The right questions can be better than good answers

You know the old proverb. Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. I was reminded of this adage when I came across a recent Harvard Business Blog on "how to ask better questions."

The author of that insightful post, Judith Ross, notes that when people (especially subordinates) come to us with questions, the natural instinct is to provide an answer. However, providing the answer may not be the best response.

Although providing employees with answers to their problems often may be the most efficient way to get things done, the short-term gain is overshadowed by long-term costs. By taking the expedient route, you impede direct reports' development, cheat yourself of access to some potentially fresh and powerful ideas, and place an undue burden on your own shoulders. When faced with an employee's problem, you can respond in a much more value-adding way: by asking the right questions, help her find the best solution herself. We aren't talking about asking just any questions but, rather, employing questions that inspire people to think in new ways, expand their range of vision, and enable them to contribute more to the organization.

Vintage automobile enthusiasts: buying or selling in Pebble Beach this August?

The second week of August is nirvana for the motorcar enthusiast as events galore take place in the otherwise sleepy communities surrounding Pebble Beach, CA. Auctions, conferences, receptions, and vintage races all set the stage for the legendary Pebble Beach Concours D’Elegance. This year is no different, with unbelievable items being auctioned (such as the chassis 19 Auto Union being offered by Bonhams, the fantastic Ferrari 250 GTs being offered by Gooding and Company, and my personal favorite - the Shebly Cobra Daytona Coupe CSX2300 being offered by Mecum).

Case Study: 1031 Exchanges and Vintage Motorcars

Classic cash strategy helps vintage automobile collectors keep $500,000 in the family...

The Situation

Since his retirement from professional racing, Joe Croydon and his wife Marilynn* have been avid collectors and restorers of vintage Grand Prix motorcars (including several classic models from Maserati, Lotus and Tyrrell). As they became more deeply involved in this hobby, the Croydons amassed a premier collection of superbly restored vintage Formula 1 and pre-F1 cars. In watching the auto collector's market, they recognized some unique and attractive investment opportunities. As is common with vintage car collectors, they were also involved in a few personal "love affairs" with certain automobiles.

New information on 1031 reverse exchanges

The financial and operational efficiency benefits of a 1031 exchange are well established. But what if your business isn't in a position to sell an asset before you buy the replacement? Maybe you haven't identified a buyer yet, or perhaps your situation requires you to keep using the existing asset until the replacement is online and ready to go?

In these sorts of situations a 1031 like-kind exchange might make financial sense, but not logistical sense.

Case Study: Blue Jay Energy

The Situation

Blue Jay Energy (BJE) focuses on the exploration, development and production of natural gas and crude oil in several regions of the United States. The company currently has proved reserves in excess of one billion cubic feet of gas equivalent and a reserve-to-production ratio of over 10 years.

The Problem

As is common with energy exploration businesses, Blue Jay’s holdings include some underperforming fields. It recently decided to divest an oil and gas leasehold with tangible field machinery and equipment so that it could reinvest in properties it expected would generate greater yields. The property it intended to dispose of was comprised of 80% real property and 20% tangible well equipment. It quickly found a buyer, but the proposed $12.9 million sale price for their 85% operating interest would result in a tax liability of roughly $4 million.

Are 1031 exchange programs the "tail wagging the dog"? Hardly...

Famous last words:

  • "We leave all our tax strategies until the end of the year."
  • "We only have one person worrying about tax issues."
  • "We're not going to let tax strategy determine how we run our business. That's the tail wagging the dog."

Believe it or not, I've heard variations on each of these themes in recent months. It's hard to imagine a competent, responsible CEO opting to jettison valuable assets, discard powerful incentives and erode cash flow, especially now, when cash is as important as it has ever been. But it's happening, and hopefully, from your perspective, the people thinking this way are your competitors.

IRS reverses field with ILM 200911006: trademarks, trade names and other customer-based intangibles are subject to 1031 exchange

In 2006 the IRS addressed the question of whether certain intangible assets were subject to Section 1031 treatment in TAM 200602034. In that case ( Newark Morning Ledger Co. v. U.S., 507 U.S. 546 [1993]) the IRS adopted a very restrictive position.

In TAM 200602034, the IRS discussed three categories of IP: (1) patents, (2) trade names and trademarks and (3) unregistered IP (e.g., customer lists, knowhow and other trade secrets). As to patents, it held the first prong of the test was met if a patent was exchanged for another patent. However, in applying the second prong, it rejected the taxpayer’s use of the patent law classification system in grouping the exchanged patents into one of four broad groups (machine, process, manufacture and composition of matter) and instead applied the six-digit North American Industry Classification System (NAICS) product codes (applicable in determining like-class for depreciable tangible personal property) in determining whether the underlying properties were like-kind.

Mid-Size Equipment Dealer Case Study

Case Study: Mid-Size Equipment Dealer Recognizes $13 m Increase in Cash Flow with a Like-Kind Exchange Program

Primary Concern
In the years 2002 through 2004 the client took advantage of Bonus Depreciation. This created additional cash flow for those years but the expiration of Bonus in January 2005 meant the client would soon have to pay that benefit back.

Challenge
The client's financial department and tax advisor were challenged by leadership to uncover a method to mitigate or even delay the pending cash drain anticipated upon the expiration of bonus depreciation. The company had realized a significant benefit by taking bonus however the existing positive benefit would be greatly reduced if additional credit had to be secured to pay back the benefit of bonus depreciation.

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