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Benefits on Conducting Appraisals
Benefits on Conducting Appraisals
LEVERAGING THE TAX CODE TO YOUR ADVANTAGE
By Donald A. Kruschke
Plastics Machinery Group CEO
There currently are several tax laws in existence that can be leveraged to your company’s advantage. However, two in particular can be considered very favorable to thermoformers and other plastics processors.
These two tax laws are:
Expense Election Under Section 179
If you have commercial property or an appreciated asset that you want to sell but are hesitant because of taxation concerns, you may want to consider the benefits of a like-kind exchange.
Rather than recognize a large taxable gain, IRS Code 1031 allows you defer the tax if you structure the deal as a like-kind exchange rather than as a sale. This enables you to apply all of the appreciation in your property, undiminished by the tax that would otherwise be payable, toward acquiring replacement property.
Essentially, IRS Code 1031 allows the seller to reinvest total sale proceeds. The amount not paid in capital gains tax to federal and state governments allows the investor to build equity. Therefore, tax deferment increases the availability of funds that can be invested and enhances value that is compounded with continuous re-investments.
To qualify for like-kind benefits, the following four conditions must be met:
The property traded and received must be used for business or investment purposes.
The property traded and received must not be held primarily for sale, such as inventory.
The properties must be of a like kind (i.e., real estate can only be exchanged for real estate).
The properties must be tangible (i.e., stocks, bonds, notes, securities, evidences of debt, or partnership interests do not qualify).
The most common types of exchanges are as follows:
One in which you trade your property for property that another party already owns (i.e., the transfers occur contemporaneously).
One in which you transfer property for the other party’s promise to acquire and transfer property of like-kind to you. Deferred exchanges must satisfy two timing rules. First, within 45 days of the transfer of your property, you must give the other party written identification of the property you want to receive. Second, you must receive that property within 180 days after transferring your property or within the due date of your tax return for the year of your transfer. It is recommended that you use an escrow account to handle a deferred exchange. The escrow holder or trustee cannot be a “disqualified” person such as your agent or someone who is “related” to you or your agent.
Exchanges Handled by Intermediaries:
The third and most common way to make a like-kind exchange is to use a qualified intermediary that is contracted to transfer (and acquire, if necessary) both properties. As with an escrow holder or trustee, the intermediary cannot be a disqualified person. Equipped with the appropriate expertise, forms and timelines, Stopol is a qualified intermediary.
The following are a few special rules about like-kind exchanges to keep in mind:
The tax consequences to the other party do not affect your tax status.
If the properties are not equal in value, one party can transfer cash or other non-like-kind property to equalize the exchange. Although non-like-kind property is taxable to the recipient, the transaction still qualifies as like-kind.
If you transfer a liability in the exchange, the liability is treated as cash and is taxable to you.
Although structuring a like-kind exchange can be complex, the tax deferral is often worthwhile. You may want to consult with your tax attorney on how to take advantage of the like-kind exchange law.
Please see the scenario below for an example of how IRS Code 1031 can work for a plastics processor:
Plastics Machinery Group informs Company A of a piece of property that is available. Company A purchases the property for $300,000 and sells it a few years later for $500,000 - for a profit of $200,000. Under normal circumstances, Company A is required to pay capital gains taxes on that $200,000. However, Stopol informs Company A of another piece of property that is available, and Company A purchases it for $500,000. By structuring the deal as a like-kind exchange, Company A is exempt from capital gains taxes until it makes a profit off the new investment.
EXPENSE ELECTION UNDER SECTION 179
On May 5, 2003, Congress passed into law the “Jobs & Growth Tax Relief Reconciliation Act of 2003″. This Act provides substantial tax incentives to manufacturers because it allows them to aggressively depreciate deductions for new and used machine tool purchases.
A key and beneficial aspect of this law is the Expense Election under Section 179, which allows businesses to claim a deduction on capital equipment expenditures. The amount of the deduction has varied since the law was enacted.
On February 13, 2008, President Bush signed into law the “Recovery Rebates and Economic Stimulus for the American People Act of 2008.” This act provides business growth incentives by increasing Section 179 expensing and bringing back bonus depreciation.
What This Means for You
Increased Section 179 Expensing.
Prior to the Act, small businesses could expense up to $128,000 of the cost of new and used equipment placed in service during that year. The Act increases the maximum expense amount to $250,000.
Return of Bonus Depreciation.
The Act brings back the special rules of bonus depreciation by permitting a bonus first-year depreciation deduction equal to 50 percent of the cost of the new property placed in service during 2008.
Section 179 Basics
Please read the information below to see how you can use Section 179 to your advantage.
Section 179 doesn’t discriminate between purchases of new and used assets.
Section 179 requires taxpayers who place more than $500,000 worth of Section 179 property into service during a single taxable year to reduce, dollar for dollar, their 179 deduction by the amount exceeding the $500,000 threshold. For example, if a taxpayer put $550,000 worth of 179 property into service during 2006, then he or she would be required to reduce his or her 179 deduction by $50,000 ($550,000-$500,000=$50,000) so that his or her 179 deduction could be no greater than $75,000 ($125,000 - $50,000 = $75,000). Again, this limit is also set to revert after 2010 to $200,000.
Section 179 provides that the 179 deduction in any given year may not exceed the taxpayer’s total taxable income in that year. If, for example, the taxpayer’s taxable income was $75,000 in 2006, then his or her 179 deduction could not exceed $75,000. However, the 179 deduction not taken can be carried over.
Section 179 can only be taken in the year that the capital asset is acquired and ready for use in the business.
Company vehicles may be expensed via Section 179 as long as they:
Have a gross weight of more than 14,000 pounds.
Can seat more than nine passengers behind the driver’s seat
Are equipped with an open cargo box of at least 6 feet.
Are equipped with a closed cargo box not accessible from the interior.
Have a fully enclosed driver compartment and load-carrying device, does not have seating rearward of the driver’s seat, and have no body section protruding more than 30 inches ahead of the leading edge of the windshield.
How This Could Work for You
The following example illustrates how current tax rules regarding depreciation can benefit those making capital equipment purchases in 2008:
A company purchases a $400,000 machine from Plastics Machinery Group. The company purchased no other capital equipment during 2008, so it may deduct $250,000 under Section 179. The remaining $150,000 is then depreciated, generating an estimated additional deduction of $21,500. The sum of these two deductions is then subtracted from the cost of the equipment, resulting in a total first-year deduction of $271,500 or 67.9 percent of the $400,000 investment. This deduction equals a real cash savings of $95,025, which means the customer essentially spent $304,975 on the machine.
Cost of Equipment $400,000
Section 179 Expense $250,000
First Year Depreciation $21,500
Total First-year $271,500
Real Cash Savings on your Equipment Purchase $95,025
(assuming a 35% tax bracket)
Cost of equipment after tax savings $304,975
This example presumes that the mid-quarter convention does not apply.
Please note that your annual deduction cannot exceed your aggregate net taxable income for 2008.
Like-Kind Exchanges and the Expense Election Under Section 179 are just two ways in which Plastics Machinery Group can help you leverage the tax code to your advantage. The next time you are thinking about selling surplus assets or making a capital expenditure, you may want to consult with Plastics Machinery Group first to see if you can further maximize your transaction.
NOTE: This information is designed to serve as a guide/ illustration for our customers. The tax calculations for each individual and/or company are unique and your tax preparer should be consulted to determine your actual savings.
Appraisals Critical to Companies’ Long-Term Viability
By Donald A. Kruschke
Plastics Machinery Group CEO
Headquartered in Solon, Ohio, privately held Plastics Machinery Group is the leader in arranging the acquisition and sale of manufacturing equipment, parts, businesses, divisions, product lines and manufacturing licenses in the plastics industry. With its vast inventory and technical expertise, Plastics Machinery Group not only helps plastics manufacturers stay on stream but allows them to quickly add capacity and capabilities. Regarded as a vital industry resource, Plastics Machinery Group uses its unparalleled market insight and extensive network of contacts to connect buyers and sellers, and provide appraisal and liquidation services. Plastics Machinery Group also offers merger and acquisition consulting expertise.
Whether for insurance, lending purposes, potential sale or succession planning, an accurate appraisal is an indispensable and critical business tool. A proactive approach to appraisals provides you with a proven method of protecting the value of your business and ensuring your company’s long-term health and viability.
There are five primary methods of using appraisals to your advantage to positively impact your operation: insurance, financing, meeting market demands, succession planning and mergers and acquisitions.
Maintaining and ensuring the value of assets is vital to the survival of any enterprise. If fire or a natural disaster strikes, you need to be prepared. An accurate and updated appraisal of your assets will save you time and money, and provide you with the leverage needed to deal effectively with your insurance company.
Many business owners have an initial appraisal on their commercial property to secure insurance, mistakenly believing that this one-time effort will provide them with sufficient protection for the lifetime of their assets. However, a general and dated appraisal leaves businesses vulnerable in a variety of ways. Without a timely and objective assessment of your property and its contents, the determination of their value rests primarily with your insurance provider. As a result, you more than likely will not receive fair market value for your assets and will spend valuable time haggling with insurance companies.
More importantly, the time you spend arguing with insurance companies or waiting for compensation for your claims can have an even-more damaging ripple effect on your company and its reputation. Time spent without a critical piece of machinery or property often translates into lost production time, which can lead to lost customers and a damaged reputation. With an updated and detailed appraisal, a company that files an insurance claim due to a fire or natural disaster will experience less aggravation and receive its fair compensation in a more timely manner. An appraisal provides you and your insurance provider with a third-party validation of your assets’ values, which eliminates the debate over how much you are to be compensated and accelerates the entire process.
In today’s ever-changing economic climate, financial flexibility isn’t a luxury; it’s a necessity. Almost every enterprise needs the financial flexibility to access additional funds when growth opportunities arise or when more cash flow is needed to ride out the lean times.
When a big job comes your way, you need to be prepared to add the additional equipment or personnel needed to increase output and deliver the results your customers expect. Continually walking away from opportunities because you cannot secure the financing not only impacts your bottom line but your reputation as well. Word gets around and pretty soon those opportunities stop surfacing entirely.
During times of flat economic growth or when more cash flow is needed to boost a venture that is not reaching its full potential, fast access to additional funding can be a real difference maker.
During times of feast or famine, an accurate and updated appraisal on your inventory, equipment and/or real estate holdings provides you with the documentation requested by banks and other financial institutions to extend your credit lines and procure the financing you need.
Meeting Market Demand
Often overlooked are the market intelligence an appraisal provides and how this valuable information can be used to make your company more agile and responsive.
Appraisals are great resources of information for formulating feasibility, marketability and “best use” analyses. Appraisers are involved daily in the buying and selling of used machinery. This experience gives them first-hand knowledge and understanding of the marketplace as well as insight into the dynamic economic swings of our industry, which can have a significant impact on the value or pricing of machinery and other assets. When you conduct an appraisal of your assets, you are capitalizing on the market intelligence your appraiser possesses and further preparing yourself for whatever the future holds. In doing so, you increase your company’s flexibility and position it to react and respond quickly and efficiently to unexpected changes in the marketplace.
A company’s future often resides with those who have been groomed to move into key leadership roles. That is why it is so important to have a clear, well-defined succession strategy in place. Without one, you severely jeopardize your company’s ability to operate uninterrupted when crisis or the unexpected occurs – a situation that can be devastating to any business’ credibility, reputation and image.
An appraisal is a key step to developing a succession planning strategy, particularly with family-owned businesses. We all know that family ownership can bring unique dynamics to the workplace. One sure-fire way to hold those dynamics in check is to have appraisals conducted on a regular basis to ensure that all family members are aware of and agree to the worth or value of assets. That way, if one family member wants to obtain a controlling interest in the company, less time is needed in trying to reach a consensus.
In addition, the data used in preparing the appraisal and final analysis of the situation may further benefit the succession planning process by providing a snapshot of a company’s needs, strengths and weaknesses. This information is incredibly helpful in identifying potential candidates and determining which kind of leadership is needed.
Mergers and Acquisitions
Determining the value of a business is no simple task. Each business brings unique characteristics that impact its worth. But unlike an automobile, there is no industry-wide authority or resource such as the “Blue Book” to verify or determine the value of a company. In this era of consolidation, companies and their financial managers must be prepared to quickly assign values to the entire company, a division, just one department or even a single piece of equipment. Credible appraisal figures also are key to any M&A negotiation process.
But without the proper guidance, where do you start? An accurate and updated appraisal is the first step in ensuring that a merger or acquisition is successful and beneficial to your company.
Appraisals are invaluable tools when conducted in a timely fashion by experienced and knowledgeable professionals. Appraisals, in and of themselves, do not create value; they merely reflect it. Essentially, appraisers study the market and historical data to assign an estimated value to a particular asset. It’s how you use this information is key to your company’s survival. Appraisals allow you to maximize and protect your assets, bolster your flexibility in responding to market fluctuations and needs, and prepare your company for future challenges and opportunities. By taking action and using appraisals to maximize your assets, you are further positioning your company for growth and success.