How to Preserve Cash Without Bonus Depreciation

WHITE PLAINS, N.Y., Aug. 30 /PRNewswire/ -- Bonus depreciation, a stimulus provision that thousands of companies took advantage of over the past two years, expired at the end of 2009.  Since Congress adjourned for their August recess without extending the provision for 2010, many are wondering, 'now what?' In a recent article appearing in the online portal of Equipment Today, Ron Hodgeman, a Tax Director for WTP Exchange, an affiliate company of WTP Advisors, puts forth a sound alternative to preserving cash.  

"The bonus depreciation provision allowed businesses to claim 50 percent of an asset's tax basis as 'bonus depreciation' and still claim the regular depreciation on the remaining basis.  By taking bonus depreciation, many of these companies paid little to no tax in 2008 and 2009," Ron writes.

However, there is a way for companies to enjoy similar tax benefits without relying on Congressional action. Under section 1031 of the Internal Revenue Code, taxpayers can structure the sales and purchases of their business assets as like-kind exchanges (LKE) and continue to recognize substantially less tax gain.  

"A company that routinely buys and sells business assets can implement an ongoing, repetitive like-kind exchange program. For example, an equipment dealer with a fleet of rental equipment can implement an LKE Program and defer the tax that would otherwise be owed upon selling the equipment.  A sale of old rental equipment and purchase of new rental equipment can be treated as an 'exchange' for tax purposes.  The IRS even released a Revenue Procedure in 2003 that provides certain safe harbors to companies that implement LKE Programs," he writes.

Hodgeman wanted to show just how much of a benefit organizations were reaping through bonus depreciation, while at the same time point out how much more taxes they would pay in 2010-2011 after the provision expired.  The low tax basis attributed to the bonus depreciation results in substantially higher tax gain at the time an asset is disposed.  As a result, "many companies will give back all the savings they enjoyed in the two years prior," he says.

However, he points out that if a company were to implement an LKE program this year, it would be able to keep its tax bill low and defer taxes, preserving cash.  

"The best thing about an LKE Program is that it is not dependent on the whims of legislators.  A like-kind exchange is commonly referred to as the ultimate stimulus provision.  There's no need to write letters to Congress every year urging them to extend section 1031.  It's simply a part of the tax code and has been for almost 90 years," says Hodgeman.

WTP Advisors is a leader in tax and business advisory services for a global marketplace. Our highly-skilled professionals equipped with years of industry experience, coupled with our cutting-edge technologies, make substantive and long-term differences to an organization's profitability. WTP Advisors is headquartered in White Plains, New York, with offices across North America, Asia and Europe.

SOURCE WTP Advisors