Welcome to tax reform

Nation's Business, Nov, 1986 by Joan C. Szabo

David L. McDuffie, chairman of Tempaco, Inc., an employee-owned wholesaling operation in Orlando, Fla., agrees. The reduction in the meals and entertainment deduction is "a big negative," he says. "Think of the extra complications we get into by that one move." Since many small businesses use lunches and entertainment as a way to sell, he says, the change could mean that more of them "will move into advertising to do the selling."

Employee lessor Mastick says a lot of her business is done over meals. The reduction won't make her change her ways, she says, "but I will have to absorb the difference."

Inventory accounting: New rules for calculating inventory costs present an added administrative burden for companies with more than $10 million in annual gross receipts. These firms will have to track inventory-related expenses, such as employee salaries, that they have been deducting as current expenses. The new law says these expenses must be apportioned to inventory, capitalized and written off only when inventory is sold. Price Waterhouse's Haddad says firms affected by the change will have "a whole new group of expenses to include in their inventory."

Says Mastick: "If smalls have to capitalize their inventory, they will face a lot of paper work, more hassles and less profits." Saundra A. Lewis, who heads an accounting firm in Nashville that bears her name, says this provision "will cost small businesses more money in bookkeeping than the government will ever raise from it." She says the change will force one of her clients, a Nashville clothing store, to invest in hardware and software for a new accounting system at a cost of $20,000 to $40,000.

On the plus side, the law does simplify rules for using last-in, first-out--LIFO--inventory accounting, making it easier to deal with inflation.

Pension plans: The new law contains stricter coverage rules and requires full vesting in five years, instead of the previous requirement of 10, for defined benefit pension plans sponsored by a single employer. As an alternative, an employer can provide 20 percent vesting after completion of three years' service, with the vesting increasing 20 percent for each subsequent year until 100 percent is reached after seven years.

These changes add to the administrative and cost troubles smalls face because existing retirement plans must be rewritten. "This is a nuisance," says Byrle Abbin, managing director for Arthur Andersen & Company's Washington office of federal tax services.

Depreciation: The law's depreciation changes generally will result in business plant and equipment as well as real estate being written off over a longer period. The upshot: smaller deductions each year. One major change is depreciation of equipment over seven or 10 years, depending on the type of equipment, instead of five or three as in the past.

Most equipment write-offs will be figured using the 200 percent declining balance method--which will permit faster write-offs in the first years after an investment is made--compared with the 150 percent declining balance method used before the law change. Price Waterhouse's Haddad says that "the changed depreciation schedules are more complicated than the existing ones."