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  1. #1
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    Default Looking to "Sell" Depreciation

    I'm not sure if I'm better off posting this here or on the Tax forum, but here goes...

    I'm entering a business deal in which I will be entitled to a $700k depreciation (based on 40% tax bracket) to be used to offset taxes. I'm looking for ways to "sell" the depreciation in order to get cash upfront. Would the following scenario work for this:

    I create an LLC and bring in a 1% partner who can use the tax break for such a high amount. The business deal would be made under this LLC. The partner puts, say, $600k into the LLC. Since an LLC can assign the depreciation to any member in any ratio, I would be receiving $600k for $700k worth of depreciation while the partner gets his taxes reduced by $100k for simply signing some paperwork.

    Does this sound feasible? Is there an average discount rate for "selling" depreciation? Any reason why someone would NOT want to buy depreciation like this?

  2. #2
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    Default Re: Looking to "Sell" Depreciation

    How do you picture that the LLC would come to "own" the depreciation? Recall, you are not the LLC - it's a separate legal entity. I'm not seeing how this could work, even in theory.

  3. #3
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    Default Re: Looking to "Sell" Depreciation

    This is solar energy deal being made with a convenience store/gas station. The upfront depreciation that we'll be coming into is a result of Solar Tax Incentive H.R. 4853 which allows 100% of the investment in new solar projects to be written off 2011 income taxes. From what I understand, the depreciation can be assigned to any member(s) of the LLC that we choose. I figure if we bring in a partner with some hefty 2011 tax obligations, they wouldn't mind paying the LLC $600k (discounted rate) in order to take the $700k depreciation. We get cash now, the partner saves $100k in taxes.

  4. #4
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    Default Re: Looking to "Sell" Depreciation

    So your LLC would pay you market value for the depreciation, and then you would somehow magically convey it for market value to this mysterious investor, and... seriously, have you given any thought to how this would work? Your LLC is not your alter ego. It's a separate legal entity.

  5. #5
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    Feb 2005
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    Default Re: Looking to "Sell" Depreciation

    Perhaps I'm not explaining myself correctly.

    The business deal will be made between the convenience store and the LLC. The LLC is the entity that is entitled to the depreciation. The LLC would consist of myself, another investor, and a third 1% member with high tax obligations. The LLC, being a pass-through entity, is able to designate which member(s) of the LLC gets to apply the depreciation to their individual taxes for 2011. In exchange for the depreciation the 1% member dumps $X into the LLC which, in turn, gets paid to the two investors.

  6. #6
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    Default Re: Looking to "Sell" Depreciation

    You're clearly not paying attention. The LLC can't acquire an asset by magic. The LLC is not your alter ego. If you want to commit tax fraud, go right ahead and commit tax fraud - but creating a straw man LLC to stick in the middle won't change the fact that you're committing tax fraud.

  7. #7
    Join Date
    May 2011
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    5

    Default Re: Looking to "Sell" Depreciation

    The structure I have seen proposed is as follows:
    Form LLC for renewable energy project or other market that allows 100% depreciation
    based on having excess depreciation "sell" 1% of the entity to depreciation investor for discounted value of depreciation.

    But all this seem to monkey with owners' equity and how is depreciation recapure dealt with. I saw this basic outline pitched by an attorney, so I'm assuming it's (at least in his opinion) legal.

    I was told depreciation sells for between 30/100 to "wall street" to 80/100 to banks. I asked for clarification on this as to xactly who "wall street" and "banks" are, and am awaiting a reply.

    From some brief research:
    "In addition, H.R. 4853 provides an additional year of increased Section 179 of the Internal Revenue Code expensing for 2012....For 2010 and 2011, companies can expense up to $500,000 as long as total purchases in either year do not exceed $2,000,000."


    So if you putting a solar formin place, the depreciation would well exceed cap.

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