Like-Kind Exchange 1031 software is used by companies that routinely sell and replace equipment. The 1031 exchange application automates the tracking of assets sold, matching to the replacement asset, and provides a tax solution, tracking the multitude of associated municipal, county and state taxes. The software automates what can be a complicated interdependent series of spreadsheets of fixed assets the company productively uses and replaces.
1031 Exchange
A 1031 exchange is typically associated with real property; however, the Internal Revenue Code Section also applies to personal property, both tangible and intangible such as construction and rental equipment that includes front loaders, excavators, cement trucks, hospital equipment, livestock, gold and silver bullion, vintage sport cars and collectibles. The 1031 exchange code requires that property be replaced with like-kind property. Real property can be exchanged for any real property, while personal property must exchange for the same general asset code or North American Industry Classification System code. Real property cannot be exchanged for personal property and vice versa. The reason to initiate a 1031 exchange and why many companies with 100 or more assets utilize a LKE mass exchange program is the deferrment of the depreciation recapture tax, which provides additional working capital that reduces the company’s need to borrow capital.
Internal Revenue Service Form 4797
For example, a company has $3 million of annual gain as itemized on IRS Form 4797, Part II and question 17. With a 40 percent capital gain tax rate representing local and state taxes and 25 percent depreciation recapture, the recognized gain or tax due is $1,200,000. Depending upon the interest rate the company secures with their lender of potentially 5 percent, the annual borrowing cost is $60,000. Should the annual fee for LKE software be $20,000, the LKE application is putting $40,000 back into the company. The LKE software fee is impacted by whether the assets are sold at any time or periodically at auction. The capital gain is only deferred with the tax ultimately due when the replaced equipment is not exchanged in a subsequent 1031 exchange. Each year until the property is not exchanged represents a savings Tax Managers and Chief Financial Officers are obligated to secure. For companies that have lived through the down times, the lessons learned are not forgotten with the current upward trend in highway repair and construction.
A LKE mass program application makes sense when the capital gain found on question 17 on IRS form 4797 is at least $3,000,000. Under the threshold, multiple spreadsheets and an experienced Qualified Intermediary can accommodate the LKE program. Spreadsheets are limited and cannot compete with the breadth and depth of LKE program functionality. With the functionality comes the cost of manpower to maintain and make software enhancements. Depending upon the LKE provider, such as Accruit or WPA Advisors, the application can be modified to meet the specific requirements of the company, including integration with the company’s fixed asset application in the company-wide resource software.
Companies with fewer than 100 assets can be accommodated manually for a moderate Qualified Intermediary fee. The process of saving the company money starts with the understanding that depreciation recapture can be deferred when replacing with a like-kind asset in a 1031 exchange.
If you would like to discuss how your company can benefit from 1031 exchanges of equipment or have a specific 1031 related question, contact our office by clicking on the button below. Isn’t it time to put cash back into your company?
