We all applauded when bonus depreciation for 2008-2009 was announced as a way to justify new equipment purchases. Many buying decisions were delayed as the economy weakened and time was marching on as tired equipment was constantly being repaired to keep businesses running smoothly. The bad news is that accelerated (bonus) depreciation will result in an artificially lower tax basis of the equipment at the time of sale and an increased exposure to tax. What happens when you get ready to dispose of that equipment in the future will either bring you relief or tax indigestion.
There is a way to mitigate the tax exposure with careful planning. Utilizing a Section 1031 exchange can defer the recapture of depreciation. It requires the engagement of a 1031 Qualified Intermediary to facilitate the transaction as an exchange and not as a sale. It also requires that the proceeds be used to acquire similar “like-kind” equipment. The “like-kind” test for heavy construction equipment is fairly broad so it is possible to exchange a bulldozer for a backhoe or paving machinery for a crawler or off-road truck.
Before the decision is made to sell the current equipment, analyze the tax implications. What did the equipment cost? How much depreciation has been taken? What is the anticipated sale price? What kind of equipment is needed to replace the current asset? Can you acquire new equipment within 180 days? The answers to these questions will be key in determining when and what to sell and what to buy.
Newbridge Exchange, LLC is prepared to facilitate the exchange of business equipment to fully comply with IRC Section 1031 as a tax deferred exchange.
