Proposed IRS Rule Would Devastate Small Businesses, Hike Costs for Property Investors

(WASHINGTON) House Small Business Committee Chairman Don Manzullo today urged the Internal Revenue Service to withdraw a proposed rule that would devastate hundreds of American small businesses and increase costs for investors who participate in like-kind property exchanges.

Manzullo, who chaired a full committee hearing on the issue today, said the proposed changes to section 1031 of the Internal Revenue Code would give a monopolistic advantage to large financial institutions at the expense of hundreds of small, independent Qualified Intermediary (QI) businesses. In addition, the IRS did not complete an adequate Regulatory Flexibility Analysis – required by law – to assess the impact on small businesses.

Currently, a business or individual may defer taxes on the sale of certain property if the proceeds are used to purchase other like-kind property. The proceeds of the initial sale are held by a business or bank that functions as a QI. These QIs invest funds collected from a sale until the funds are used to purchase new land or personal property. In most cases, interest earned by a non-bank QI is split between the QI and the entity making the swap. Existing regulations require both parties to pay taxes on the interest they each receive; thus, there is no “homeless” income.

The proposed IRS change would not allow the independent QI to retain any interest and would hurt the ability of these QIs to compete against large banks. If non-bank QIs are unable to retain any part of the accrued interest, they will have to raise the fees they charge to businesses engaged in property swaps. As a result, non-bank QIs will no longer be competitive with banks, who can invest the money in other ways and absorb lower fees.

In addition to its detrimental impact on small businesses, the proposed rule would increase the costs for investors who participate in like-kind exchanges, Manzullo said. Industry officials estimate the few QIs who do survive the rule change would have to skyrocket their up-front fees to stay competitive. Once all the small businesses are run out of the industry, the larger institutions will feel free to increase fees themselves.

“This proposed rule would destroy hundreds of small businesses in America and increase costs for property investors,” Manzullo said. “I can’t understand at all why the IRS would want to make this change, especially without fully studying the impact on small businesses. I strongly urge the IRS to withdraw this rule immediately.”

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