Briefing: March 2003
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.
Websites We Love
HowBizWorks is great, if you ever get there. The site is a link off HowStuffWorks ( www.howstuffworks.com), a shameless devourer of time. Sure, you might log on for a primer on copyright law. But first you must pass a homepage that lures you, sirenlike, with the secret inner workings of everything from fiber optics to root beer. Click on the Biz button to find strategies for improving your supply chain (ask vendors to throw in inventory-control systems; break out transportation costs). Then hit that Back button and read about the amazing robotics that powers Big Mouth Billy Bass, the wall-mounted singing fish.
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
A Few Good Public Companies
For businesses that hope to go public, "This is a time to stand out from the clutter," says Harvard Business School professor Josh Lerner. Only 97 companies managed to complete an IPO last year, including just 52 on the NASDAQ exchange, which spawned 485 offerings back in 1999. But despite its small size, last year's class is, to date, outperforming every other year's worth of offerings since 1997. At presstime, share prices for 2002 IPOs were up an average of 1.6%, according to Thomson Financial. That may not sound like much of a gain, but consider that the average prices of IPOs during the boom years were down significantly (see chart).
According to Richard Tadler, managing director of TA Associates, a Boston-based private-equity firm, the 2002 companies are doing well because they come from relatively stable fields like health care and finance, rather than high tech. They are also more likely to be profitable than their predecessors. Lerner adds that the people running newly public companies have what he deems to be stronger credentials. For example, their management teams typically consist of executives who hail from several respected companies, rather than one former employer, and aren't a group that has been together since the start-up phase. --Rod Kurtz
|Year|| Number of
| Average % change |
offer price to closing
prise, at presstime
Source: Thomson Financials
Websites We Love
Employers' Newest Pet Benefit
At a time when companies are cutting health insurance benefits, it may seem strange that the number of businesses offering coverage for their staff members' pets is going to double next year. But that's the finding of a 2002 survey of companies and employees commissioned by insurer MetLife. The trend appears to be growing -- largely because it's a winner with employees.
Veterinary Pet Insurance, based in Brea, Calif., is the nation's largest provider of pet coverage. Founder and CEO Dr. Jack Stephens, a veterinarian, says he's seen business increase by 40% from 2001 to 2002. The company offers pet insurance as a voluntary benefit to more than 400 companies. Workers pay for it themselves -- generally $12 to $16 each month, but they receive a significant group discount by buying the insurance through their employers.
While pet protection is more common at very large companies, small businesses sometimes offer more generous benefits. For example, Don Mayer, CEO of Small Dog Electronics in Waitsfield, Vt., has provided insurance coverage for up to two dogs for each of his 23 employees since 2000. The company pays 80% of vet bills, maxing out at $2,000 a year. The cost to the company generally runs between $2,000 and $5,000 annually. "It's the kind of benefit that goes a long way toward employee satisfaction and loyalty," says Mayer, who also happens to be a dog-lover, as is evident in his company's moniker. --Kate O'Sullivan
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