case studies

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.

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.

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.

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.

Trucking Industry Case Study

CASE STUDIES: Trucking Scenarios

To get a real feel for the financial impact of a Like-Kind Exchange (LKE) program, it is best to review the 5-year cash flow benefit for certain volume levels. Every business is unique so each implementation of an LKE program is slightly different; however, these examples should provide a general understanding of the benefits.

Small Equipment Industry Case Study

Case Study: Equipment Dealer Recognizes $2.5M 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.

Koshnogos Trucking Case Study

To get a real feel for the financial impact of the institution of an LKE program, it is best to review some typical situations. Each implementation of an LKE program is slightly different, however, these case studies should provide a general understanding of the benefits.

Koshnogos Truck Leasing
Koshnogos Finance is in the business of leasing tractors and trailers. Given the high usage rates associated with their leased trucks, they typically upgrade their clients’ trucks every four years. One common transaction for Koshnogos is the sale and repurchase of a tractor for inclusion in their lease portfolio.

The Imperial Real Estate Case Study

The Problem

William Smith purchased The Imperial Apartments in 1998 for $1.5M and he's been taking approximately $50,000 in depreciation deductions against the property each year (27.5 year MACRS residential rental property). He sold the building in February 2008 for $2.5M.

At the time of sale, his tax basis in the property was $1M. He purchased another apartment building in July, paying $3.25M. The new building is also 27.5 year MACRS residential rental property and is depreciated for tax purposes from the time of acquisition. Smith's 2008 tax consequences are significant.

The tax gain recognized on the sale of the apartment building is $1.5M ($2.5M sale price - $1M adjusted tax basis = $1.5M), making his total tax $350,000.

Case Study: Flying 9 Farms

Flying 9 Farms* is a mid-sized farm based on the West Coast. Their profile is typical of the average American thoroughbred farm in size and scope of operations.

The Problem
In early 2006, Flying 9 Farms successfully bid on a horse named Slammin' Sammy. After winning several Grade 1 races with the horse, Flying 9 decided to sell him. Owners believed Slammin' Sammy would likely bring $600,000 at auction, but were concerned with the potential tax bill since the horse had a very low tax basis. Flying 9's controller concluded that the farm would owe approximately $200,000 in federal and state taxes upon sale of Slammin' Sammy.

Automotive Scenarios Case Study

CASE STUDIES: Automotive Scenarios

To get a real feel for the financial impact of a Like-Kind Exchange (LKE) program, it is best to review the 5-year cash flow benefit for certain volume levels. Every business is unique so each implementation of an LKE program is slightly different; however, these examples should provide a general understanding of the benefits.

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