Business taxes would be cut sharply, with a major change in the present system of tax allowances for investment, under President Reagan's tax proposals.

The Reagan plan calls for more generous depreciation allowances which would let businesses write off investments much more quickly and thus claim bigger and earlier tax deductions.

The tax plan for business is close to the "10-5-3" proposal of Reps. Barber Conable (R-N.Y.) and James Jones (D-Okla.), which groups all assets into one of three classes for depreciaion purposes and accelerates the depreciation schedule so that more of the tax gain comes at the beginning of the write-off period. This gives a huge tax break to profitable companies in capital-intensive industries that invest in long-lived assets.

Under the proposals all machinery and equipment, apart from that for research and development, would be written off in five years, regardless of its "useful life." At present, an approximate useful life is calculated for different kinds of equipment based on how long an investment is expected to last, and the depreciation is linked to this useful life.

Research and development machinery and equipment would be written off over just three years, under the new plan, as would autos and light trucks. o

Many nonresidential buildings, which now can be depreciated over anything from 25 to 60 years, would be written off in only 10 years, under the Reagan proposals.

The plan also would allow bigger investment tax credits for many investments. The credit would go up to 6 percent for investment in property in the three-year category and would be 10 percent for machinery in the five-year category.

The business cut would be made retroactive to Jan. 1 and phased in over five years, Reagan said yesterday. By 1986 corporate taxes would be slashed by 40 percent overall.But Treasury tax revenues from business would drop by only $2.5 billion in the current fiscal year and by $9.7 billion in fiscal 1982, the Treasury Department estimates.

This cost would soar to an estimated $59.3 billion by 1986 as the program became fully effective and business took up the more generous depreciation deductions available on its new investment.

The 10-5-3 plan had been criticized by some who said it oversimplifies depreciation rules and gives special aid to new building construction rather then re-equipping out-of-date plant and equipment. The administration's version provides for slightly less favorable tax treatment of many buildings than the original 10-5-3, but it still would give a relatively larger tax break to many firms investing in buildings than to many of those installing new machinery.

It picks up a proposal from the Senate Finance Committee bill approved last fall to reward businesses that use their own buildings. Factories, stores and warehouses used by the owners would be written off over 10 years under an accelerated schedule.

Leased nonresidential buildings and low-income housing would be depreciated over 15 years, and other real estate over 18 years. But their writeoff would be "straight line," with an equal proportion of the cost written off in each year rather than according to an accelerated schedule.

One interesting feature of the new plan is that it would, for the first time, favor industrial and commercial buildings rather than residential building.

Public utilities will do well out of the change, although not as well as under a pure 10-5-3 plan. Their equipment, which now is written off over less than 18 years, would go into the five-year category, and the rest into the 10-year category. This represents a marked speeding up of their writeoffs.

A spokesman for the Edison Electric Institute, which represents 200 investor-owned electric utilities that generate 77 percent of the nation's electricity, said that while he could not comment on the president's proposals the institute "would work very hard to get something like" 10-5-3. As it is the most capital-intensive industry in the country, the electric utility industry will gain by such a program.

Steel companies, which under present law write much of their investment off over 15 years, would gain by having their equipment and plant depreciated over only five years. But more generous depreciation allowances only help profitable companies. The Carter administration proposed making the investment tax credit refundable so that nonprofitable companies could take immediate advantage of it.

Steel industry sources said yesterday that Reagan's plan would be well-received by the industry, but one added that there would be disappointment because of the lack of refundability.

Treasury Secretary Donald T. Regan said yesterday that the accelerated depreciation plan would benefit many service industries, as well as manufacturers.

Some manufacturers, for example auto companies, typically write off their equipment in a short time and may have the write-off period actually extended under the Reagan plan. However their investment tax credits would be raised under the plan.