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Interpreting the GOP Tax Reform Plan -- Part 2

by
Nov 9th 2017
Founder/CEO CWSEAPA PLLC
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In the first of this five-part series, we explored some provisions of the Ways and Means Committee’s tax reform bill. We focused on C-Corporations, S-Corporations, increased equipment expensing, increased Section 179 expenses and other provisions. In this article, we go one step further regarding business changes.

LIKE-KIND EXCHANGES

The like-kind exchange rules currently allow taxpayers to defer tax on the built-in gains in property by exchanging it for similar property. With multiple exchanges, gains essentially may be deferred for decades and ultimately escape taxation entirely if the property’s basis is stepped up to its fair market value upon the death of the owner.

Under the provision, the special rule allowing deferral of gains on like-kind exchanges would be modified to allow for like-kind exchanges only with respect to real property. The provision would be effective for transfers after 2017. However, the provision would provide a transition rule to allow like-kind exchanges of personal property to be completed if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before December 31, 2017.

The bill provides full expensing for most tangible personal property, which establishes a marginal effective tax rate of zero percent to fully expensed property, equating to the deferral that like-kind exchanges provide currently.

TREATMENT OF ADDITONAL PAID-IN CAPITAL

Currently, Paid-In Capital (PIC) is an additional amount paid by a shareholder that is in excess of par value or the market rate of the stock. Under the provision, the gross income of a corporation would include contributions to its capital, to the extent the amount of money and fair market value of property contributed to the corporation exceeds the fair market value of any stock that is issued in exchange for such money or property. Similar rules would apply to contributions to the capital of any noncorporate entity, such as a partnership. The provision would be effective for contributions made and transactions entered into after the date of enactment.

DEDUCTIONS ELIMINATED FOR BUSINESSES

Domestic Productions Expense would be eliminated. Entertainment expenses would also be terminated, except for the expenses for food and beverages, which would be deducted by the normal 50 percent. Certain self-created property would no longer be deductible.

The technical termination of a partnership rule would be repealed. Thus, the partnership would be treated as continuing even if more than 50 percent of the total capital and profit interests of the partnership are sold or exchanged, and new elections would not be required or permitted. The provision would be effective for tax years beginning after 2017.

BUSINESS TAX CREDIT REPEALS

The Tax Cuts and Jobs Act includes numerous other repeals, including:

  • A repeal of the credit for clinical testing for certain drugs used to treat rare diseases.
  • Elimination for the deduction of certain unused tax credits.
  • A repeal ending the rehabilitation tax credit.
  • Elimination of the employer provided child care credit.
  • Termination of the credit for expenditures for making a building handicapped accessible.
  • A repeal of the work-opportunity tax credit.

In my next article, Part 3 in the series, I will tackle the individual tax reforms.

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