Commentary: Help the American Economy: Keep the Like-Kind Exchange

By on June 27, 2017

by Carrie Roider, CEO of Erb Equipment Co., a certified John Deere dealership

Tax reform is shaping up to be the centerpiece of the 115th Congress. That much, we know. The details, not so much.

Here’s what we do know: The Trump Administration’s broad strokes plan has two components, tax cuts and a simplification of the tax code.

Carrie Roider, CEO of Erb Equipment Co.

Simplification of the code and elimination of unfair loopholes are noble intentions. But we should be careful to not sacrifice critical provisions of the tax code that stimulate the economy in pursuit of this goal.

Take Section 1031 of the tax code, the like-kind exchange. The manufacturers of equipment that builds our infrastructure like bulldozers and excavators, the dealers that sell them, and the builders that put them to use all rely on this essential part of the tax code to help grow their businesses.

Importantly, the like-kind exchange isn’t a loophole: It has long been enshrined in the tax code.

Companies use like-kind exchanges to defer taxes on gains realized through the sale of business assets, like fleet vehicles, as long as they reinvest those gains in replacement assets.

This is crucial, because like-kind exchanges do not eliminate taxes owed. Taxes are paid on the gain when the business sells the replacement asset in a conventional sale in the future.

This helps alleviate high up-front costs for many small businesses. A farmer or small manufacturer can sell old equipment to help fund their upgrades without taking a tax hit. Taxes are eventually paid.

Like-kind exchanges are a win-win for the country. Businesses rely on it to expand, which ripples out to millions of service providers and manufacturers connected to them. Elimination of the Section 1031 will require current operating capital to be redirected to tax payments reducing the capital available for job creation and reinvestment in the communities.

Far from a special loophole, economists consider the like-kind exchange a smart lever for growth. Congress should too, and maintain this critical provision in its current form.

 

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