<p>You know the old proverb. Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. I was reminded of this adage when I came across a recent <a href="http://blogs.harvardbusiness.org/hmu/2009/05/real-leaders-ask.php&quot; target="_blank">Harvard Business Blog on "how to ask better questions."</a></p>

<p>The author of that insightful post, Judith Ross, notes that when people (especially subordinates) come to us with questions, the natural instinct is to provide an answer. However, providing the answer may not be the best response.</p>

<blockquote>
<p>Although providing employees with answers to their problems often may be the most efficient way to get things done, the short-term gain is overshadowed by long-term costs. By taking the expedient route, you impede direct reports' development, cheat yourself of access to some potentially fresh and powerful ideas, and place an undue burden on your own shoulders. When faced with an employee's problem, you can respond in a much more value-adding way: by asking the right questions, help her find the best solution herself. We aren't talking about asking just any questions but, rather, employing questions that inspire people to think in new ways, expand their range of vision, and enable them to contribute more to the organization.</p>
</blockquote>

<p>The distinction Ross draws is critical for the manager and the leader. On the one hand, you can be short-term task-focused, and in that case you provide an answer (or better yet, <em>the</em> answer). On the other hand, you can think long-term and focus on the health and self-sufficiency of your learning organization. That is, you can give the employee a fish or you can teach the employee to fish.</p>

<p>The expedient approach may get a problem off the desk more quickly - a seductive choice in a busy and resource-strapped environment - and it takes an investment of time and effort to teach fishing skills. However, the leader who consistently teaches discovers that over time fewer and fewer reports walk into the office with questions. They've learned to be self-sufficient, they've learned to solve problems, they've learned to think, and most critically, they have learned to <em>learn</em>. Instead of an organization with one person at the top who knows the answers, you have an organization where everybody either knows the answer or is empowered and equipped to find or develop that answer. This is especially important in <a href="/blog/americas-looming-macro-succession-crisis-boomers-xers-millennials-and-future-your-workplace" target="_blank">organizations that rely on the talents of Millennials</a>; this cohort is energetic and diligent, but is not by nature very good at critical thinking or problem-solving.</p>

<p>This results in a variety of benefits for the organization and its people. Here are a few things that occur to me off the top of my head:</p>

<ul>
<li>More efficient use of manager's time and effort.</li>
<li>More efficient problem solving throughout the organization.</li>
<li>Stronger collaboration as team members grow more confident and capable.</li>
<li>Organization ceases to be the sum of its parts and becomes a full-fledged learning organism where the whole far exceeds the sum of the parts.</li>
<li>Fosters a greater distribution of authority and allows many important decisions to made closer to the locus of expertise.</li>
<li>Organization becomes a desired place to work, improving ability to attract and retain talent (and all the implications this has for staffing and turnover-related costs).</li>
<li>In larger organizations, a single group or department can become an incubator for talent development across the entire business.</li>
<li>Productive cultural change results as success breeds success (a new <a href="http://web.mit.edu/newsoffice/2009/successes-0729.html&quot; target="_blank">MIT study suggests that we learn from successes</a> while we may not learn from failures at all).</li>
</ul>

<p>Of course, all these points have clear and powerful implications for the organization's productivity and prospects in the marketplace.</p>

<p>I'll always remember a class I taught once, a number of years ago, at a small college in North Carolina. I was forcing my students to slog through a particularly frustrating problem, and every question they asked I answered with a question of my own. Finally, one of my brighter (and more vocal) charges snapped: "Will you just tell us <em>the answer</em>?!!"</p>

<p>No, I wouldn't, and if I had I'd have been doing them a disservice. She may, over time, have forgotten any answer I gave her, but I promise you, she'll never forget how to fish.</p>

<p>The same goes for your employees.</p>

<p>The financial and operational efficiency benefits of a 1031 exchange are well established. But what if your business isn't in a position to sell an asset before you buy the replacement? Maybe you haven't identified a buyer yet, or perhaps your situation requires you to keep using the existing asset until the replacement is online and ready to go?</p>

<p>In these sorts of situations a 1031 like-kind exchange might make financial sense, but not logistical sense.</p>

<p>The good news is that the tax code allows what's known as a "reverse exchange," which lets you buy the replacement asset first and sell the relinquished asset later. You can keep using your existing asset in the meantime, and you still get all the benefits of a forward exchange - that is, the ability to defer recognition on the gain from the sale, which can exceed 40% of the proceeds in some cases.</p>

<p>Reverse exchanges aren't as well known as other types of 1031 exchange and we get a lot of questions about how they work. So we've pulled together a more detailed resource that explains what it is, how it works, etc. We encourage you to take five minutes and have a look.</p>

<ul>
<li>Learn more about 1031 reverse exchanges of real estate</li>
<li>1031 reverse exchanges</li>
</ul>

<p><strong>The Situation</strong></p>

<p>Blue Jay Energy (BJE) focuses on the exploration, development and production of natural gas and crude oil in several regions of the United States. The company currently has proved reserves in excess of one billion cubic feet of gas equivalent and a reserve-to-production ratio of over 10 years.</p>

<p><strong>The Problem</strong></p>

<p>As is common with energy exploration businesses, Blue Jay’s holdings include some underperforming fields. It recently decided to divest an oil and gas leasehold with tangible field machinery and equipment so that it could reinvest in properties it expected would generate greater yields. The property it intended to dispose of was comprised of 80% real property and 20% tangible well equipment. It quickly found a buyer, but the proposed $12.9 million sale price for their 85% operating interest would result in a tax liability of roughly $4 million.</p>

<p><strong>The Solution</strong></p>

<p>Blue Jay has conducted 1031 real property Exchanges in the past, but has done so with Qualified Intermediaries that rely on inefficient paper-based processes. As a result of this added administrative burden company leadership has never fully integrated Like- Kind Exchanges (LKEs) into their strategic planning, operations and asset recovery strategy.</p>

<p>BJE was referred to Accruit by its bank. Accruit established a qualified escrow account under the Trust company at the bank to assure maximum security of funds. Accruit then helped the firm facilitate the sale and purchase of the new lease and equipment as an LKE.</p>

<p><strong>The Results</strong></p>

<p>The exchange was conducted successfully, allowing the company to defer $4 million in tax liability – money that it then invested in more promising properties and new oil and gas tubing and casing. In addition, Accruit’s patented process and one-to-one client services model created a degree of efficiency that Blue Jay had never imagined possible. Blue Jay’s senior leadership and finance team were enthusiastic about both the monetary benefit and the ease of use associated with the Accruit process. Other QIs they had worked with only specialized in real property and failed to account for the differences between real and tangible assets. Blue Jay is now considering implementation of a full-scale Accruit 1031 program.</p>

<p><strong>The Problem</strong><br />
William Smith purchased The Imperial Apartments in 1998 for $1.5M and he's been taking approximately $50,000 in depreciation deductions against the property each year (27.5 year MACRS residential rental property). He sold the building in February 2008 for $2.5M.</p>

<p>At the time of sale, his tax basis in the property was $1M. He purchased another apartment building in July, paying $3.25M. The new building is also 27.5 year MACRS residential rental property and is depreciated for tax purposes from the time of acquisition. Smith's 2008 tax consequences are significant.<br />
The tax gain recognized on the sale of the apartment building is $1.5M ($2.5M sale price - $1M adjusted tax basis = $1.5M), making his total tax $350,000.</p>

<p>• Federal Long-term Capital gains Tax: $1M appreciation x 15% = $150,000<br />
• Tax Attributable to Unrecaptured Section 1250 gain: $500,000 depreciation x 25% = $125,000<br />
• State/Local Tax (assumes 5% state tax rate): $1.5M tax gain x 5% = $75,000</p>

<p><strong>The Accruit Solution</strong><br />
Working with Accruit, Smith structures the sale of The Imperial as a §1031 single exchange, letting him defer this tax debt indefinitely.</p>

<p><strong>The Results</strong><br />
After executing an LKE, the recognized tax gain on the sale of The Imperial is $0. The benefit to Smith is the deferral of $1.5M of tax gain, resulting in a total tax savings of $350,000 in the year of sale.</p>

<p>* This case is based on a typical real estate exchange scenario.</p>

<p><strong>Why put a tax-deferral program in place when taxes are low?</strong><br />
<br />
Lessors and other savvy owners of business assets understand the financial benefits of a well-managed, programmatic 1031 Like-Kind Exchange (LKE) system. But "bonus depreciation," a currently&nbsp;low capital gains tax rate, a reduced effective overall tax rate resulting from reduced corporate profits, and the prospect of increasing tax rates in the future are all causing asset owners to question whether a 1031 LKE program makes sense for them at this time. The simple answer - regardless of current taxable status - is probably a resounding "<em>yes.</em>"</p>

<p><strong>Bonus depreciation is intended to provide additional incentive for investment in capital assets</strong>, just as the original <a href="http://www.1031.org/about1031/faq.htm&quot; target="_blank">Section 1031</a> provisions were intended to do when they were instituted in the 1920s. These are effectively complimentary incentives, not competing ones. Bonus depreciation, by its very nature, allows the owner's tax basis to be written down more aggressively, meaning that the "gap" between fair market value and depreciated basis grows more quickly. This gap is the taxable income an asset owner realizes when the asset is sold. Consequently, while the owner realizes a current tax benefit from the acceleration of depreciation, upon sale of that asset the "benefit" is partially repaid through tax on the "gain" if the sale price exceeds the depreciated basis - unless, of course, the owner replaces that asset with a like-kind asset, and defers the tax through a 1031 exchange.</p>

<p><strong>Another feature of the 1031 LKE allows for "step-in-the-shoes" depreciation</strong>, meaning the &nbsp;replacement asset enjoys the carry-over basis, effectively deferring the tax and leaving the cash &nbsp;available to the owner for purchase of the replacement asset. Fleet owners, lessors with a &nbsp;portfolio of assets, and companies constantly replacing capital assets used in their business can &nbsp;enjoy both the accelerated depreciation and the LKE benefits that convert tax liability to cash &nbsp;for investment.</p>

<p><strong>But what if the owner's tax rate is lower today than it is expected to be in the future?</strong> Does it make sense to pay the tax today instead of deferring into a higher tax rate environment?</p>

<p>This question can be answered theoretically, but working with an LKE expert to determine the specifics of each situation is advisable. In general, however, deferring the tax today by replacing the sold asset with a like-kind asset through a 1031 exchange, generates a higher financial return. One of the basic tenets of the US leasing industry, where nearly $650 billion of assets are leased and financed annually, illustrates that a dollar of tax paid today is more expensive than a dollar of tax paid "tomorrow." And unless the taxpayer plans to liquidate or go out of business, the opportunity to employ successive LKE's effectively allows an indefinite deferral of the tax liability for so long as replacement assets are being acquired.</p>

<p><strong>Regardless of the amount of deferral, any amount not paid in current taxes is, effectively, another source of cash. </strong>At a time when credit tightening, widening spreads, and increasingly-burdensome covenants and conditions characterize the capital markets, a careful cost-of-capital analysis will illustrate another real benefit of an LKE. Some owners measure the value of their LKE not as a tax deferral, but by its impact on their real cost of funds - the avoided cost of issuing debt or equity is significant, and by preserving the cash that otherwise leaves the company in the form of taxes paid, owners can re-deploy that cash to acquire replacement assets at a lower effective cost. Lower effective cost of assets then translates into greater operating efficiencies, which improves margins and profitability or makes the enterprise more competitive in the market. Either way, tapping the cash "hidden" in assets being sold and replaced is by all measures a good thing.</p>

<p>Finally, there's considerable value in <strong>putting in place an asset management process</strong> to track multiple depreciation streams on a single asset; match assets sold and acquired to optimize the like-kind opportunities; compare high-tax-basis assets with lower-basis assets when deciding which to sell (to optimize after-tax proceeds) - the process itself can help make an enterprise more efficient. Designed to optimize the LKE deferral, a system that also provides asset management information can be a valuable differentiator for day-to-day operations.</p>

<p><strong>So for those business asset owners who think the current tax environment may not be the right time to put in place a comprehensive, programmatic 1031 LKE process supported by systems and professionals, there may actually never be a better time.</strong> Ski slope operators use the time when there's no snow on the slopes to do the sub-surface and trail maintenance that will make their revenue season better. Fire marshals conduct their safety inspections and recommend improvements when buildings are not on fire. Farmers don't wait for the infestation to protect crops from pests. And taxpayers should seize the opportunity of putting systems in place even when the immediate impact may not be as great as they should expect it will one day be.</p>

<p>It's no surprise that people are concerned about security these days. We've all seen the stories - from ponzi schemes to hackers to highly publicized business failures - so it makes sense that individuals and business would want to make sure their valuable financial and information assets are being safeguarded by the most reliable processes available. At Accruit we hear these questions and we welcome them because <em><strong>we have no higher priority than the security of our clients’ funds and data.</strong></em></p>

<p>We've recently completed a new brief that articulates Accruit's security processes and philosophies. Our clients' funds are held in the nation's top-rated financial institutions, their data is secured by hundreds of ISO and SAS audited processes, and that's just the beginning.</p>

<p>We encourage you to review the <a href="/sites/default/files/Security.pdf" target="_blank">Accruit security policy</a> sheet and <a href="/contact-us" target="_blank">contact us</a> if you have questions.</p>