This New Year may not be so happy for thousands of companies when they discover that they can no longer reap the benefits of 100 percent bonus depreciation in 2012. CFOs and tax directors across the country could see their tax bill double or more in the coming year. Fortunately, there is a solution. Companies can combat higher taxes and increase cash flow by implementing a like-kind exchange (LKE) program now. Commonly referred to as the ultimate stimulus provision, an LKE has been a part of the tax code for approximately 90 years.
Since September 2010, companies of all sizes have been able to write-off the entire cost of most capital expenditures. After a difficult battle between the House and Senate, the ability to expense such purchases came to an end. On Dec. 23 President Obama signed into law H.R.3765, the Temporary Payroll Tax Cut Continuation Act of 2011. Although the original bill passed by the House included several tax extenders, the Senate could not find a way to pay for these items. As a result, the final legislation does not extend 100 percent bonus depreciation for another year.
“Many companies have no idea what is coming and are not prepared for the impending cash flow drain,” said Ron Hodgeman, tax director at WTP Exchange, an affiliate company of the global tax and advisory firm, WTP Advisors. “The expiration of 100 percent bonus depreciation on December 31, 2011 will result in skyrocketing taxes in 2012 and beyond.”
The negative impact of 100 percent bonus depreciation expiring is two-fold. First, companies will recognize substantially higher tax gain on the sale of their business assets. Most assets sold over the next few years will have little-to-no tax basis at the time of sale as a result of bonus depreciation. And second, companies will see a substantial drop-off in the amount of depreciation expense reported on their tax returns.
“Not only will companies recognize substantially more tax gain on the sale of their business assets, but they will also have less depreciation expense to offset these gains,” said Hodgeman.
The answer to this problem can be found under section 1031 of the Internal Revenue Code, whereby taxpayers can effectively manage their tax liability by structuring the sales and purchases of their business assets as like-kind exchanges. A company that routinely buys and sells business assets can implement an ongoing, repetitive LKE program. For example, an organization with a fleet of rental vehicles or equipment with an LKE program can defer the tax that would otherwise be owed upon selling the assets. The IRS even released a revenue procedure in 2003 that grants several safe harbors to companies that implement LKE programs.
Certain professional trade organizations and publications are taking measures to warn members of the impending tax problem and how to plan for it. The Auto Rental News published an editorial in its September/ October 2011 issue entitled “2012 Tax Hit: Are You Prepared?” which discusses the end of bonus depreciation and cites the benefits of an LKE program for the car and truck rental industry. However, thousands of companies, across a broad spectrum of industries, headed into 2012 with no plan in place.
“An LKE program is a great way for companies to avoid giving back all the tax savings they enjoyed in the last few years,” said Hodgeman. “And one of the best things about it is that we do not have to depend on Harry Reid seeing eye-to-eye with John Boehner .”
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