Some businesses can start up with a laptop in the corner of a coffee shop. Other businesses require more capital investment in order to have a fighting chance. Trucking companies, construction firms, and farms (1) require a hefty number of physical assets in order to launch and maintain a viable, competitive operation.

Section 1031 of the tax code recognizes the special burden on businesses like these. It permits them to defer some taxes on property-related capital gains and to put off some of their tax liabilities related to depreciation recapture when exchanging equipment for similar, like-kind items of equipment.

This treatment of like-kind exchanges simply encourages reinvestment. It’s not a loophole – taxes are not avoided by a 1031 exchange; they can only be deferred.

Deferral gives the business an opportunity to make better use of its resources without borrowing (2), reinvesting in the interest of growth, which in turn creates jobs and expands the economy. It’s a smart trade-off for the US Treasury, which benefits from a growing economy now, while capturing the deferred taxes later on.

But there are some shortsighted groups who would like to do away with Section 1031. They would rather collect $1 in taxes today and sacrifice more than $3 in economic growth tomorrow (3). You’d never take a deal like that with your own money, but some people find it easy to avoid critical thinking when other people’s money is involved.

Until someone comes up with an app that moves dirt like a bulldozer or a smartphone that hauls building materials like a semi-truck, some businesses will always require heavy reinvestment in physical property in order to keep the economy humming. Section 1031 makes it possible for them to do so in a way that preserves economic growth (4) while maximizing the long-term benefits to the Treasury, and in the end, overall to the American small-business owner.