A recent article over in Inside Supply Management is shining a new light on asset reinvestment by pointing out that many companies can save as much as 44% of sale proceeds if they use like-kind exchange (LKE) or “1031” exchange to defer capital gains tax on sold assets when the sale is being used to generate cash to buy new, similar, assets to replace deprecated supply chain assets.
If you plan reinvest the the funds from the same of an asset in a similar or like-kind asset within the IRS established timelines to identify and purchase the replacement asset and conduct the transaction through a qualified third-party intermediary, then you defer the capital gains tax. This can save your organization a considerable amount of money over time if you’re selling over a million dollars of depreciated assets each year as you bring new, like, assets into the mix. As per the example in the article, if you sold $2 Million worth of assets each year and replaced them with like assets, after five years, that’s $10 Million worth of assets sold. If you ended up paying the equivalent of 40% in taxes, that’s 4 Million dollars you lost from cash-flow if all of the assets were replaced.
Seems like a no-brainer to me, especially since it will only cost a few thousand a transaction to have a qualified and knowledgeable legal or accounting firm act as the qualified intermediary, which is a fraction of what you’ll save when you’re selling Million dollar assets.