Brent Abrahm, Accruit co-founder and executive vice president, joined by presenters Marty Verdick, managing director of RSM McGladrey Inc. and Chuck Aton, CEO of SVI, an independent franchise of National Alamo Car Rental, led a panel discussion aimed at conveying the benefits of repetitive like-kind exchanges for those in the car rental industry.
Frequently used in real estate, like-kind exchange (LKE) is a process where a business disposes of one asset (in this case a vehicle) and acquires another similar asset in the same class while allowing the funds to flow through a third-party individual known as a qualified intermediary. The business then defers income tax on the transaction. Since 1921, Congress has allowed the deferral of gain on exchanges of this sort using Section 1031(a) of the Internal Revenue Code, however, it is just now beginning to be used in the car rental industry.
According to the panel, though, the benefits of a like-kind exchange for rental car companies are simple — they can avoid paying a 40% tax on the gain earned from selling and buying vehicles and use the capital saved to pay down interest on loans or to purchase more vehicles instead. “Depending on your buying and selling patterns, and if you’re growing your fleet or not, you can defer taxable income almost up to the average cost of your fleet over time, which at a 40% tax rate could be a substantial advantage,” Aton said. “Will that bill ever come due? Sure it will, but at that point you may be selling your business.”
RSM’s Verdick used his time to try and simplify for the audience just how a like-kind exchange works when trading assets other than real estate. Verdick said that vehicle trades can be considered like-kind property as long as they fit within the same asset classes specified under section 1031 of the IRS code or within the North American Industry Classification System (NAICS). The latter, part of the U.S. Census Bureau, replaced the U.S. Standard Industrial Classification (SIC) system in 2002 as a tool to compare statistics of North American business activity. “As long as we’re trading assets in those general asset classes, that is like-kind property,” Verdick said. “So, trading a car for a car is like-kind, but trading a car for a light duty truck is not, because those are in two different general asset classes. Once we stay in the same general asset class, though, we’re good.”
The more complex rules associated with like-kind exchanges were then addressed, such as the necessity for car rental companies to identify within 45 days the replacement for their relinquished vehicles. The panel discussed the IRS’s need for this identification process to be “unambiguous,” meaning that it has to be put into writing and made to be as specific as possible, such as identifying the make, model and year of the vehicle.
“The regulations give us some guidance in this. For instance, if you actually acquire the replacement property within the 45-day period then you’d be deemed as satisfying this identification process, as well,” Verdick said.
Other parameters for LKEs were discussed, as well, such as the need for replacement property to actually be received before a 180-day period has lapsed. Also mentioned were the due date of a company’s tax return, and the fact that a qualified intermediary is generally used to complete the exchange to avoid constructive receipt of the sales proceeds.