by Brent Abrahm, President and CEO, Accruit
A powerful tax-deferring strategy to free additional cash from your surplus sales
In recent years, corporations have invested more heavily in asset recovery strategies, realizing that a surplus of depreciated assets was costing American businesses billions of dollars each year. As a result, asset recovery groups are now focused on boosting internal efficiencies, increasing revenues and preserving the value of business assets. New requirements to reduce idle inventory, recycle useable materials and otherwise maximize asset values have placed a significant burden on those charged with tracing and reporting the final disposition of business assets.
The array of asset types implicated by these strategies seems limitless. Any industry that produces surplus equipment, single-use materials and scrap metal is likely to have a boneyard that needs cleanup, and the implementation of an asset recovery strategy can recoup savings in the millions. The hidden costs of maintaining these assets and poor land use are particularly commonplace in the economic merger or acquisition environment, where idle resources take time to come to light.
However, the universe of recoverable value is even larger. Investment recovery departments are now commonplace in aerospace, electronics, metals/ mining, oil and gas, utilities, telecommunications and many other industries, where they’re able to better manage the lifecycle of the company’s entire
asset portfolio and realize value out of the asset before it becomes obsolete or useless.

Investment Recovery professionals should be aware of a capital gains tax deferral tool that they can integrate neatly into the asset disposition planning process. This tool is a tax strategy called the 1031 exchange, also known as a like-kind exchange (LKE). 1031 exchanges derive their name from Section 1031 of the United States Tax Code, which has been on the books since 1921. The law allows a business to postpone paying capital gains tax on the sale of one asset if the proceeds

from that sale are immediately reinvested in a “like-kind” asset. (See article on pages 10-11 for more specifics)
Benefits of 1031 exchanges The financial benefit to a company with a 1031 program can be dramatic. The tax bill on the sale of a depreciated asset is usually in the range of 40% of the total price of the sale. So when a company sells a million dollars worth of equipment that has been fully depreciated on its books, it then owes the IRS around $400,000. If, however, the company uses the proceeds to purchase likekind replacements, it can keep an extra $400,000 working for its business.
The good news for an investment recovery professional is that like-kind classes can be quite broad. For instance, a dozer is considered like-kind to a scraper, and in the oil and gas industry, tubing can be likekind to a Christmas tree (the assembly of valves, spools and fittings used for a well). Scrap copper is like-kind to a transformer, because the scrap is viewed according to its original use and
not the end product. Virtually all types of real estate are like-kind to each other. (However, real estate in the United States is not considered like-kind to foreign real estate.) Many people familiar with the process compare LKEs to getting an interest-free loan from the government, and the analogy is apt. Even better, the deferral is indefinite. The company will eventually owe the tax, but as long as it keeps its 1031 program rolling, there is no set time when the payback is due. Meanwhile, it’s enjoying all the benefits of having that cash at work in its operation.
1031 Exchanges are applicable to nearly any industry or business
If companies or individuals are aware of LKEs, it’s usually with respect to real estate, where 1031
exchanges are common. However, a vast majority of senior executives in potentially affected companies don’t realize that 1031s apply to far more than real estate. Since these industry leaders don’t know that they can maximize their cash flow through LKEs, they wind up handing over critically needed cash to the IRS. For instance, recycled tubing or unused valves in the oil and gas industry are candidates for a like-kind exchange. A lift truck or the vehicle fleets in the utility industry are also potential business assets that can be used in a like-kind exchange. Even scrap metal that’s recycled can be exchanged. The list goes on, from corporate jets to manufacturing hardware, from heavy equipment to intangibles such as mineral rights and licenses.

Literally, any asset held for business or investment purposes is eligible. No matter what industry a business is in, odds are pretty good that the word “green” has come up lately. The drive toward more sustainable operations means different things in different places— from replacing dated HVAC systems to transforming wasteful manufacturing processes into competitive advantages (note the Wall Street Journal’s recent profile of Subaru of Indiana, for example) to upgrading fleets to comply with stricter state emissions regulations—but it’s a rare business that can afford to be cavalier about uneconomical processes.

That last example has been of particular concern to California companies, especially those with vehicle fleets (transportation enterprises, leasing firms and construction companies, for instance). Since it seems likely that California-style standards will become the model for all states in the near future, it’s important for asset recovery professionals to begin thinking about how they’re going to handle the challenge. Maybe old vehicles are sold and replaced with new ones, but in some cases the smarter approach may involve retrofitting.
How to pay for it all? Well, there are a variety of state, federal and local tax incentives out there, and greater efficiency pays for itself…over time. Still, up-front costs can be significant. A company that
factors the inherent value of 1031 exchanges into the equation, however, will find the payoff point to be closer than it might have imagined.
Conclusion: LKes, a tool for getting Maximum Value for Your Assets

Whether conducting investment recovery of business assets or a real estate 1031 exchange, this established tax code is integral to any sound asset management strategy. If a company is paying taxes, it’s likely leaving too much valuable investment recovery cash on the table. Transforming idle assets into improved cash flow is the outcome of a 1031 exchange. There are several types of LKEs,
from one-time exchanges to “reverse” exchanges (where you can buy your replacement asset before selling) to robust 1031 exchange programs that handle large numbers of assets on an ongoing basis. In all cases, though, LKEs can generate the cash necessary to support a fully efficient investment recovery program, providing a substantial operational and competitive advantage.