Customers and employees want cleaner building methods with a smaller carbon footprint, and con-struction companies are ready to start generating a revenue stream fueled by alternative means.
But when the banks are tight with credit, the economic realities of 2009 are an obstacle for the green movement. Though investments in sustainable infrastructure will eventually pay for themselves in ongoing operational savings and increased customer sales, significant upfront costs are unavoidable.
Here’s the good news: a long-established federal tax provision, called the Section 1031 Like-Kind Exchange (LKE), can help businesses make costly improvements and upgrades that previously seemed out of reach.
Powerful Planning
When planning for this year and next year, consider whether federal, state and local incentives will pay for cash-intensive green upgrades and how to qualify for those government dollars.
Using the existing tax code, and without relying on new incentive packages, most construction companies can find a way to green their businesses. Section 1031 of the federal tax code, the LKE, has been on the books since 1921 as a business-friendly tax provision allowing companies to reinvest their operations’ monies. Section 1031 isn’t a tax loophole—this program is designed to keep business money in the pipeline, building company strength for greater profits, job creation and growth.
Through the years, LKEs have been used primarily for real estate property exchanges, but their application is actually much broader. A LKE is a viable option for companies considering upgrading their fleets, installing green equipment or investing in more sustainable infrastructure.
Replacing Assets and Infrastructure
The LKE works for nearly any kind of property used in business—from trucks and bulldozers to cranes and real estate. The code stipulates that when a company sells a depreciated asset, it can defer realizing the tax gain associated with the sale (often up to 40 percent of the sale price) if it then uses the proceeds to purchase a similar or “like-kind” asset.
For example, a construction company seeking to comply with stricter state emissions standards needs to upgrade its fleet to include cleaner, more efficient trucks, cranes, skid steers, wheel loaders and backhoes. It launches a program to replace 20 assets per year for the next five years. In doing so, it sells the old assets at auction to offshore interests for an average of $50,000 a piece, realizing a taxable gain of $1 million. Because these funds are then reinvested in new assets, that tax burden is deferred—with a cash flow benefit of approximately $400,000.
Other construction industry applications for LKEs include replacing inefficient back-office infrastructure (including heating/cooling, plumbing, lighting and IT assets) with advanced energy-saving technologies.
Construction executives should investigate the various options for greening their practices to see what works best for their businesses. The time has never been better to explore ways to turn all that green planning into reality, taking advantage of both long-existing tax codes such as Section 1031 and newly available stimulus money.
![]()
Friday, September 3, 2010