Reprinted with permission from the Houston Chronicle
November 25, 2016
Op-Ed by Randy Lee
Small businesses are the backbone of the American economy because they account for 99.7 percent of all U.S. employers. As Black Friday has become a shopping bonanza, a new concept, “Small Business Saturday,” encourages consumers to buy items from their local shopkeepers.
Small businesses thrive and consumers have many choices because smart tax policy encourages small business growth. In our current system, when a small business manages to make ends meet, they can reinvest profits into expansion and upgrades like new machinery, technology or additional assets. Proposals are floating around D.C. that would divert those would-be investments right to the IRS. “Small Business Saturday” is a good time to focus on tax policies that make success possible for the vast majority of our nation’s employers.
Small businesses depend on America’s free flow of capital in two ways. One, small business needs eager consumers. The like-kind exchange encourages reinvestment in assets produced by American small and medium sized businesses and manufacturers. Second, and most important, like-kind exchanges allow these small businesses to upgrade assets and grow without being punished by taxes. Like-kind exchanges remove artificial and unnecessary tax concerns from their calculus to invest in and grow their businesses. In fact, like-kind exchanges encourage entrepreneurs to grow their business and not “cash out.”
The like-kind exchange rules under IRC Section 1031 allows for the deferral of capital gains tax and ordinary income tax on business assets if the asset is exchanged for a like-kind business or investment asset. Like-kind exchanges encourage investment and reinvestment in U.S. assets by making it easier for taxpayers to relocate or upgrade into assets that better meet their business needs. Entities involved in like-kind exchanges are reinvesting in their business activity without having to pay a tax on that continued investment.
A new tax on investment would be disastrous for businesses, and especially small business – removing opportunity and increasing reliance on debt. A 2015 Ernst and Young study on like-kind exchanges found that repealing Section 1031 would discourage investment and result in longer holding periods, greater reliance on debt financing and less-productive deployment of capital in the economy. Because the provision is used extensively by small businesses, it is easy to see why its repeal would be problematic.
Without like-kind exchanges, businesses and entrepreneurs would have less incentive and ability to make real estate and capital investments. If Congress forces upon small business the tax accounting fiction of immediate recognition of a gain upon the swapping of one investment real estate or other capital assets for another, it will simply leave small business with higher costs to obtain financing and investment capital, a greater reliance on debt financing and discourage investment in new assets and growth.
It is important to understand, under the Section 1031 like kind exchange rules, taxes are not avoided but simply deferred. Therefore, the Federal government benefits from the continued growth and value generated by this activity – the end result being higher growth and more revenues for the Federal government.
Repealing like-kind exchanges will have disastrous effects on the entire business community, but especially U.S. small and medium sized businesses that are not in the same financial position as multi-national companies. With the U.S. economy just starting to turn around, Congress must do everything it can to retain policies that allow for growth in our economy and prevent capital formation efforts by small business owners across the country from being punished by tax policy.
Lee, CEO of Randy Lee Public Affairs, LLC, is former senior vice president of Government Affairs and the National Office of State Governmental Affairs For Stewart Title.
© 2013 Hearst Newspapers, LLC.
Reprinted with Permission