The Tax Cuts and Job Act (TCJA) implemented changes across the board on asset treatment within business taxation. A “like-kind exchange” or “1031” based on IRC Section 1031 precludes a taxpayer from recognizing a gain on the sale of a business asset if they purchase a replacement business asset. The basis of the old asset is rolled into that of the new and a gain on the sale of the original asset is deferred until the replacement asset is sold. This is a way for businesses to avoid paying taxes on the sale of assets if a replacement is purchased.
Prior to the TCJA, this treatment was available for both personal and real property. The TCJA now limits this to only real property. This provision triggers the recognition of “boot” in the sale of real property if any personal property is included in the sale. “Boot” would be the personal property attached to the real property and is considered taxable in the sale, even if replacement real property is purchased. For example, if an apartment building is sold but the building has furniture, fixtures, appliances or any other personal property, taxes must be paid on the value of that personal property or “boot.” 1
Two proposed ways of mitigating the taxation of the gain on the sale of attached personal property include: abandonment and charitable contribution. The Journal of Accountancy provides an excellent evaluation of the new law. 2
Abandonment
Using the example of the apartment building, a taxpayer may find it beneficial to call in a demolition crew to gut the interior of all personal property prior to sale, abating the taxable gain. A demolition crew may be able to come in and clear out the interior of the buildings for much less cost than the tax on the gain. However, we suggest this is the option to be avoided.
Charitable Contribution
The taxpayer could instead contract to remove all personal property and donate it to a nonprofit or governmental entity (public schools, colleges, parks and recreation departments, etc.) Nonprofits providing resale of interior items to low-income communities or who donate items to the underserved are prime candidates for these donations. If the business has not fully depreciated these assets, they may be able to have the items appraised and deduct the Fair Market Value as either an itemized deduction on the 1040 if they are a pass-through entity or as a charitable contribution on form 1120 if they are a corporation. To ensure the appraised value deduction can be taken, a nonprofit must use the donations within their “related-use” provision. If material is donated to an organization not using or selling the items as part of their mission, the subsequent resale by the nonprofit could trigger a reduction in appraised value retroactively to the taxpayer. 3
The Green Mission Inc. specializes in waste diversion including producing appraisals for clients able to take the tax deduction. Additionally, we offer waste-diversion management services and can help clients find nonprofit and governmental entities in need of the property donations. We work diligently to ensure the cost of waste diversion is commensurate or less than demolition and ensure our client’s timelines are not delayed by choosing to donate over demolish. We have front-loaded our research nationwide regarding nonprofits and governmental entities in need of donations and can provide lists to the client so they can choose to whom they would like to donate. We supply logistics for moving, manage the timeline and ensure our clients are satisfied with the efficiency of our processes. Most importantly, we are diverting hundreds of tons of waste from the landfill while helping to supply the donations which organizations need. Our processes can help save localities funds by using donations for items that would have otherwise come from their operating budget. Organizations such as shelters for abused women and children, job-training facilities, schools for children with special needs and many other worthy missions have been helped by our waste diversion efforts. Perhaps the best part of our jobs are seeing the satisfaction both our donating clients and recipients organizations experience when we connect the two, divert waste and help them fulfill their missions.
