Let’s say you own two similar assets and are seeking to sell one of them. They’re the same model, the same age, have been used roughly the same amount, and even under close inspection a potential buyer can’t find any real difference. So which one do you sell?

Some businesses might think that, given the similarities, it doesn’t make any difference which asset they sell. But in reality there may be a significant difference, one that’s worth thousands of dollars in immediate cash flow benefit for your company.

How do you know which asset to sell? The following case analysis illustrates the problem.

Hi-Lo Equipment: a case study

Every day, Hi-Lo Equipment’s sales team, which is probably a lot like most dealer sales groups around the country, is encouraged to not only identify new business, but also to sell, sell, sell. When the economy tightens, the heavy equipment industry is notorious for selling anything that isn’t nailed to the floor, whether it’s new, used or from the rental fleet. “If we can make a sale, regardless from which fleet, we will make it,” is Hi-Lo’s philosophy.

But does this always make sound economic sense? What if a Hi-Lo sales guy just sold a motor grader that’s participated in several rounds of like-kind exchanges? Say this motor grader was similar to several others on the lot, all of which are 2006 and 2007 models. The 2006 motor grader he just sold may have a remaining tax basis that’s a small fraction of the original cost. The remaining assets were purchased at approximately the same time but were not qualifying replacement assets for LKE purposes, and therefore maintained a high tax basis with little or no tax depreciation.

For a detailed look at the choices facing the Hi-Lo salesman, have a look at this table, which outlines the tax implications for several similar assets on the lot.

Compare assets 5 and 6, for instance. These two motor graders may be sitting side by side on the lot. They have roughly the same number of hours in use, and even upon close inspection the prospective buyer can’t see much difference. The sale price is about the same. So the Hi-Lo salesman sells asset #6.

Did this sale help the company’s bottom line? No, it didn’t. The books may show that this transaction was profitable on paper, but this narrow view ignores the all-important cash impact. Hi-Lo banked $213,000 in either case, and since both assets had comparable acquisition costs the profit may seem identical. However, the dealership owes the IRS more than $80,000 instead of $20,729.

If Hi-Lo couldn’t match the sold asset with a qualifying piece of heavy equipment, they’ve now incurred a tremendous tax gain and associated tax bill. Had the sales guy instead sold motor grader #5, their tax gain would have been minimized, they’d have moved a non-producing piece of equipment and they would have improved their financial metrics. By providing extra incentives to the sales team to move high-basis assets, Hi-Lo Equipment could have saved themselves $60,000 in tax gain.

Selling Strategically: Accruit Basis Projection

Even companies with large internal accounting and asset management teams can have a difficult time tracking the tax implications for all of their individual assets. Fortunately, the Accruit Basis Projection (ABP) simplifies this complex task and helps businesses better understand how to maximize their cash flow.

These detailed analysis tools (a summary report and a more robust detail report) allow Accruit clients to determine the tax gain on an asset-by-asset basis before they sell it, optimizing cash flow in the near term and supporting longer-term tax and asset management strategies. The ABP allows examination of the entire portfolio and also accounts for additions and step-in-the-shoes layers.

• Uses Tax Depreciation Report as baseline
• Helps predict gain
• Combines dollar amounts of all addition and step-in-the-shoes layers at the parent level
• Calculates mid-quarter depreciation convention if needed
• Detail report shows:
  • Projected current year depreciation if sold
  • Projected end cumulative depreciation if sold
  • Projected end adjusted basis if sold
• Summary report shows:
  • Number of assets on hand by model
  • Minimum & maximum basis if sold by model
  • Difference between minimum & maximum basis if sold by model
• Report delivered in Excel format, affording maximum flexibility in analysis

Act Now

Your business already considers a variety of financial factors when evaluating inventory. The Accruit Basis Projection adds even more powerful tax and cash flow data to your decision matrix, helping you make the best and most cash-friendly decision possible.

For more program details, information on pricing and how your business can benefit from the Accruit Basis Projection, contact your Accruit Client Service Manager or Bob Abrams (303-865-7313).