There are two (2) types of equipment exchanges.
- Single or Occasional Exchanges. This includes one or more pieces of equipment, not necessarily the same type of assets, such as construction equipment, bought and sold during the taxable year.
- LKE Exchanges. An LKE exchange involves multiple exchanges of 100 or more properties for a client that regularly and routinely enters into agreements to sell and purchase tangible personal property.
Why would I need a LKE Exchange?
Leasers of equipment and owners of significant amount of tangible property, such as transportation companies, construction companies, auto/truck rental, heavy equipment and livestock companies can use LKE exchanges to safely unlock the cash hidden in your valuable corporate property.
You can sell depreciated and appreciated assets and defer taxes on recognized gain, which may be as much as 40% of the sales proceeds. You can buy and sell just as you always have, while deferring the tax - perhaps indefinitely.
Why not just depreciate or expense the purchase of new equipment in the year of sale to avoid the tax on the sale?
The answer is not either depreciate or exchange assets. Sellers can utilize exchanges and expense the value of additional equipment purchased. In addition, 1031 Exchanges can eliminate five (5) specific expenses that 100% expensing cannot.
- Exchanges permit the deferral of taxable gains of both federal and state income taxes. 38 states do not recognize 100% expensing and require an add back of depreciation taken resulting in state income taxes on the sale gains.
- Exchanges eliminate depreciation recapture now and in the future for private companies.
- Exchanges eliminate 67% to 80% add back of sale proceeds for purchases of used equipment.
- Exchanges reduce overall financial cost for new equipment and used equipment by reducing debt incurred to acquire equipment, the net interest paid and the taxes due on operating income used to repay non-deductible debt payments.
- Exchanges preserve the tax benefits of net operating losses against future operating income by eliminating gains from the sale of assets.
Is This Exchange Right For Me?
If your business purchases and sells more than one hundred items of tangible business assets, LKE exchanges conserves your cash flow, reduces your debts and promotes efficient utilization of your corporate assets. IRS Procedure 2003-39 outlines the rules governing "LKE Program" exchanges.