Briefing: March 2003

News and trends, including the Bush dividend, green-eyed Teamsters, fat and happy IPOers, and the throwback jersey rage.

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Briefing

Bush's Little Dividend

By far the most controversial aspect of President Bush's $670 billion tax-cut plan is the elimination of the dividend tax for investors in C corporations. If Bush's plan passes, C-corp owners could hypothetically draw profits out of the business in the form of tax-free dividends while taking a lower salary. However, Henry Aaron, senior fellow at the Brookings Institution, says that strategy makes sense only for owners who pay personal income taxes at a higher rate than the 15% to 39% federal tax on corporate profits. Don't forget: Companies get a deduction for paying wages. Interestingly, C corps that choose not to distribute dividends might actually fare better under another provision of the Bush plan -- the proposed deemed-dividends rule, which could mean a huge reduction in the capital-gains tax. Let's say a company posted $100,000 in profit, which it reinvested. If the business was later sold, the equity holders could declare $100,000 of the selling price to be tax-free, reducing the capital-gains tax, which is generally 20%, but ranges from 8% to 28% for long-term gains. --Bobbie Gossage

How Much Can You Deduct?

Another provision of the Bush plan: tripling the small-business deduction, from $25,000 to $75,000, for purchasing new depreciable equipment. Critics argue that the rule does almost nothing to help mom-and-pop operators. "Most small businesses don't have that much to invest anyway," says Bob McIntyre, of the Institute of Taxation and Economic Policy, an advocacy group for tax fairness. One entrepreneur who could take advantage of the proposed rule is Bob Perini, owner of a bottled-water company called DrinkMore Water in Gaithersburg, Md. The business invests tens of thousands of dollars each year in new trucks, bottle coolers, manufacturing equipment, and computers. "I don't see it being a motivating factor in my buying," Perini admits. "I'm going to buy equipment whether I get a deduction or not. But don't get me wrong -- I'll happily use it. It'll save me a good chunk of money." --B.G.

Florida Moves to Kill an Industry

Florida may soon shut down businesses that cater to the state's 3 million retirees: importers of prescription drugs from Canada. Most are storefront middlemen that send orders to Canadian pharmacists to be filled and shipped back to patients in the States. Drugs are cheap up north because Ottawa caps prices and the Canadian dollar is worth less than ours. But importing pharmaceuticals is illegal under federal law, and Congress rejected a recent effort to ease the ban. So far, a Food and Drug Administration spokesman says, the feds have "tolerated" importers, but Florida ruled they are practicing pharmacy without a license. One target of the crackdown may be Discount Drugs of Canada in Delray Beach. "It's really a wild stretch to say that we're practicing pharmacy," says owner Earle Turow. "We don't have any drugs here." --B.G.

Shipping Costs and Competition

Topic No. 1 in the shipping industry is the fear that Mexican truckers will soon be transporting goods within the United States, possibly driving down prices. Previously, they could operate only in narrow zones before transferring their loads onto U.S. trucks. Late last year, President Bush decided to lift the ban. The Teamsters declared their opposition months earlier when -- in a move worthy of the Sierra Club -- the union joined a lawsuit to maintain the ban, claiming an influx of Mexican trucks would harm the environment. An appellate court agreed to block the Bush move in January, so don't expect shipping discounts yet. Even if the rule does go into effect, Mexican companies must certify that their trucks meet 22 federal environmental regulations. So far, just 130 carriers have started the process. --Nicole Gull

A Retail Slam Dunk

While most clothing retailers are in a funk, the sports-apparel category is booming -- in part owing to the popularity of uniforms that once went the way of the set shot. Sales, driven by the hip-hop community's obsession with retro gear, rose in all four major sports in 2002. "Classic jerseys have become a fashion rage," says Sal LaRocca, of the National Basketball Association. One business profiting from the trend is Distant Replays, an Atlanta store that began as a mall kiosk in 1997. Co-owner Andy Hyman claims revenue rose from $350,000 to $3.2 million in five years -- and that he grossed a record $450,000 in December 2002. The replica jerseys he sells are cut from the original patterns and cost $200 to $400. "I suspect we have two more years of being really hot," says Hyman. "It's Prada for men." --Patrick J. Sauer

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