In: Accounting
Will Rate Immediately:
TCJA (Tax Cut Jobs Act) changed the law for tax free exchanges so that now only real property can qualify for like kind exchange treatment, meaning deferral of gain recognition.
Do you think this law is good tax policy ? Why or why not?
The Tax Cuts and Jobs Act of 2017 (TCJA) now limits the non-recognition treatment to only like-kind exchanges of real property (not held primarily for sale), eliminating the taxpayer's ability to defer gains on all types of personal property, including intangible property.
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Improved real property is generally of like-kind to unimproved real property. For example, an apartment building would generally be of like-kind to unimproved land. However, real property in the United States is not of like-kind to real property outside the U.S.To report a like-kind exchange, taxpayers must file Form 8824, Like-Kind Exchanges, with their tax return for the year the taxpayer transfers property as part of a like-kind exchange. This form helps a taxpayer figure the amount of gain deferred as a result of the like-kind exchange, as well as the basis of the like-kind property received.The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made several significant changes to the individual income tax. These changes include a nearly doubled standard deduction, new limitations on itemized deductions, reduced income tax rates, and reforms to several other provisions
This provision could have an unexpected negative impact on certain exchanges of real property. If a taxpayer gives or receives property that is not like-kind property as part of a larger transaction, gain recognition may occur. Property that is not like-kind property is called boot. Under the new provision, if an exchange of real property also includes ancillary personal property, the personal property would be considered boot and could create a taxable gain for the taxpayer. One potential solution to this issue is for a taxpayer to look to the significant bonus depreciation options available to mitigate that gain.
The Good
1. The Congressional GOP finally got out of its own way and accomplished something.
2. At the macro level – a rising tide floats all boats – the new tax law will be good for America.
3. Corporate America – replaced their top tax rate of 35%, with a permanent, flat rate of 21%, making our big firms more competitive globally.
4. American multi-national corporations received more in a permanent “territorial” tax rate reduction for profits made abroad.
5. The alternative minimum tax for corporations is repealed – permanently.
6. The corporate tax cuts will accrue to thousands of small businesses formed as C Corps.
7. Small businesses (the pass-throughs), like Sub S Corps, LLCs, sole proprietors, and partnerships – millions of small firms – will get a 20% deduction on “qualified” business income. The deduction will be applied before the income lands on the owner’s individual return and taxed at the individual rate.
8. Section 179 direct expensing of capital assets for small businesses rises from $500,000 to $1million.
9. Individuals still have seven tax brackets in the new law, but each one is lower than before. So the effective tax rate for individuals will go down, even if changes in other deductions impact taxable income. Don’t spend it all in one place.
10. The Obamacare individual mandate is abolished – forever.
The Bad
1. The TCJA is not real tax reform.
2. What makes us think American multi-nationals will invest tax cuts on repatriated foreign profits in the U.S.
3. Unlike corporations, the alternative minimum tax for individuals was not repealed.
4. Even though Section 179 direct expensing was doubled most small businesses don’t put hundreds of thousands into capital acquisitions in a year.You don’t get points for giving someone something you know they can’t use.
The Ugly
1. small businesses do with tax cuts, and that they create half of the economy and jobs? If Congress wanted to make sure tax cuts would drive the economy and grow jobs, they would at least treat small businesses the same as big ones. And yet, corporate America got a 40% effective rate reduction in the form of a permanent tax cut, while “qualified” small businesses got about a 9% effective rate reduction – and even those crumbs expire after 2025. it gets worse.
2. inexplicably, millions of small business owners, like attorneys, accountants, and consultants – won’t qualify for the 20% deduction.
so to conclude his tax bill will be good for America, the economy and the stock market.
but it is very bad from perspective of small businessmen
The CBO estimates that TCJA will increase deficits by a cumulative $1.9 trillion through 2028, even after incorporating the impact of the new law on the economy. If lawmakers make the temporary provisions of TCJA permanent, the long-term effects will be even more dire.
TCJA helped the rich more than the poor and thus increased the inequality of income, which had already been growing for the past 4 decades.
The future of TCJA remains uncertain. Nearly all of its individual income tax changes will expire between now and 2026. Other provisions, such as its pass-through rules and many of its international provisions, may not stand the test of time. What is clear, though, is that TCJA took tax and fiscal policy in the wrong direction.