When companies dispose of assets used in their trade or business,
taxable gains can be recognized. This occurs due to the benefits of accelerated depreciation which allow companies to deduct depreciation benefits
which may be in excess
of the actual reduction in value of the asset that occurs over time. The
tax benefit of the accelerated depreciation will reverse when the
asset is sold because the accelerated depreciation is "recaptured"
upon sale, potentially resulting in a substantial income tax liability.
The provisions of Internal Revenue Code (IRC) Section 1031 allow
deferral of gain
recognition when disposed assets
are replaced with similar assets, and allow companies to avoid paying tax currently. However, the rules of IRC Section 1031 are complex
and formula-driven, which has discouraged many companies from participating in Like Kind Exchanges for trade or business
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