CORPORATE TAXATION
New Rates: Companies that earn more than $100,000 annually stand to benefit handsomely from Reagan's proposal to slash the top corporate tax rate from 46% to 33%. But businesses with income below that level will find their corporate tax cut almost nonexistent. Under Reagan's program, the tax rate would remain at 15% for the first $25,000 of corporate income, and at 18% on earnings from $25,000 or $50,000. The current 30% tax on corporate income from $50,000 to $75,000 would be cut by only 5%.
As a result, a company with income of less than $50,000 would realize no savings under the President's plan, while one with $75,000 in taxable income would gain only $1,250. "That ain't hay," points out Thomas P. Ochsenschlager, a tax partner in the Washington, D.C., office of Alexander Grant & Co. "But I'd hate to think that any business is going to rise or fall on that amount."
Obviously, companies that earn in excess of $75,000 might want to defer as much of their income as possible to take advantage of the proposed 33% rate. If you have a major new sales campaign planned for late this year, you might also consider delaying the launch until 1986. Some accountants even suggest that companies put off billing their clients or collecting late accounts until next year, provided that there are other compelling business reasons to do so.
Minimum Tax: Reagan has proposed a 20% corporate minimum tax to ensure that companies with large deductions pay their fair share. This measure is aimed at large, capital-intensive businesses, but it could be harmful to small manufacturers as well.
As it is currently structured, the new corporate minimum tax would resemble the alternative minimum tax now in place for individuals. It would generally require companies to compute their tax liabilities two ways. First, they would figure their taxes under the standard corporate income tax rules; then they would make a separate calculation for the minimum tax. That computation would involve subtracting $25,000 from taxable income, and adding back in so-called preference items, including, for example, 25% of net-interest expenses (subject to certain limits), intangible drilling costs for oil and gas, and a portion of depreciation costs. That figure would be multiplied by 20%, the minimum tax rate. Companies would then pay the higher of their two tax bills.
CAPITAL INVESTMENT
Real Estate Depreciation: Current law provides two mechanisms for depreciating buildings. One is the straight-line method. The other is the accelerated cost recovery system (ACRS), a procedure created by Reagan in his Economic Recovery Act of 1981.
The straight-line method is the simplest. A business divides the cost of the building by 18 (the minimum number of years required for recovery), then deducts the result from the company's taxable income each year until it has written off the cost. ACRS also uses 18-year write-offs, but allows for accelerated deductions to provide larger write-offs in early years of ownership.
Under Treasury II, the recovery period for buildings would balloon to 28 years. In addition, ACRS would be scrapped in favor of another mechanism -- the capital cost recovery system. CCRS would allow companies to figure inflation into the amounts they depreciate, an advantage over the current system, but not necessarily a big enough one to offset the loss of rapid 18-year write-offs.
Companies in the market for real estate might consider making their purchases before year's end to lock in depreciation deductions under the more favorable 18-year rules. Likewise businesses that are erecting new structures might want to start construction right away. "There is a distinct possibility that Congress will grandfather in these buildings," says Ochsenschlager.
Equipment and Machinery Depreciation: President Reagan's plan would stretch out, in most instances, the time required for companies to recover their investments in business equipment and machinery. For example, it would eliminate three-year write-offs for automobiles and light trucks -- mainstays for several million small retail and service businesses. In their place would be a new, lengthier schedule that calls for write-offs under this timetable:
* five years for trucks, office equipment, and computers;
* six years for construction machinery and airplanes;
* seven years for general machinery, furniture, and fixtures;
* ten years for railroads, ships, and engines.
It should be noted, however, that the accelerated rates for certain of the classes may be higher than the rates under the current ACRS.That could result in larger write-offs up front for some types of equipment.
Direct Expensing: Back in the 1970s, a capital investment "expense allowance" provided small businesses -- especially small sole proprietorships -- with a tax break. They could deduct as a business expense 100% of the cost of any piece of equipment. The only catch was that the limit on this allowance was $2,000.
In 1980, small-business groups began to push for a $25,000-a-year allowance, an amount that would benefit 90% of all small enterprises. They eventually compromised on a graduated allowance that began in 1982 at $5,000. Under the President's proposal, this allowance would be capped at $5,000, wiping out scheduled increases in 1988 (up to $7,500) and in 1990 (up to $10,000).
