The ability to share some basic knowledge of Sections 1031, 168 and 179 can create a terrific win-win scenario with customers: use of these profit-enhancing tools improves their financial condition, putting them in a better position to purchase more products and services and leaving them grateful for the insight!
Everyone involved in running an asset-intensive business is well-served with a basic understanding of a few parts of the Internal Revenue Code (IRC), whether selling those assets, renting them or using them within operations.
Ensuring that your tax advisor reviews your company's situation in light of IRC Sections 168, 179 and 1031 may prove extremely valuable to your bottom line. At the same time, notifying customers of the potential benefits these sections have to offer may lead to them buying more, and more often, from your organization!
Section 168 “Bonus Depreciation” is again off the table as of January 1, 2015. It was reinstated by Congress and the President on December 19th, 2014, but only through the end of the year. When active, this part of the Code allows companies to depreciate an additional percentage of a new asset's value in the same year it is placed into service. Assets covered include vehicles, machinery and other operating items (assets with a useful life of 20 years or less, so real estate is generally excluded).
Section 179 “Depreciation Allowance” has reverted to its historically low level of $25,000 as of the start of this year. As with the temporary change to Section 168 above, a much higher “179” ceiling of $500,000 was enacted on December 19th, for 2014 only. Section 179 allows taxpayers to take additional depreciation on new or used “business equipment” purchases in the same year they are placed into service, currently up to the $25,000 ceiling, and with certain other restrictions.
I mention these two Sections because according to Washington insiders, it's likely that the Feds will bring them back for 2015 at some point. Hopefully, this occurs sooner rather than later in the year so businesses can factor related financial benefits into their purchasing plans.
In the meantime, Section 1031 remains a great alternative for companies looking to modernize or upgrade assets, as it provides similar net benefits to Sections 168 and 179. The primary differences with a Section 1031 Like-Kind Exchange are: 1) the need for an exchange of assets (a sale and purchase rather than a purchase only); and 2) the need for a third party to assist in completing the Exchange.
A 1031 Exchange allows a taxpayer or “Exchanger” to keep money in their business (or portfolio in the case of an individual) that would otherwise go to the IRS as normal income tax or capital gains tax on the sale of assets. 1031benefits include improvements in cash flow, buying power and tax depreciation benefits while minimizing income tax exposure, operating costs and financing costs incurred on asset/equipment purchases.
1031 Exchanges are allowable on real estate deals and on reinvestments involving most other assets as well: vehicles, machinery, licenses, collectibles and countless other categories. If an asset is held for investment or business use (and not as inventory for sale), it is most likely eligible for a tax-deferred 1031 Exchange.
Perhaps you have customers who routinely participate in “1031s” or use of the other Sections mentioned above. If not, chances are you will run into some before long, or your tax advisor may suggest that your company put them to use. There is certainly no shortage of related information available online, including on our website:EquipEx1031.com.
Ken Palmen is President and co-owner of EquipEx, a Qualified Intermediary company dedicated to broadcasting Tax Code information that impacts businesses and to assisting customers in completing Section 1031 Like-Kind Exchanges. Please call 855-313-7080 toll-free or 720-266-6095 in the Denver area.
Published on November 10, 2015 | Categories: Finance
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