In the arcane world of accountants, where depreciation years translate into dollars and the slip of a congressman's pen can mean the difference between profit and loss, Stanley P. Snyder, of Snyder and Newrath, had a client with a unusual problem.
Unlike most businesses, which got a taste--if not a large swallow--of a tax break in the $749 billion tax-cut legislation passed earlier this year, Snyder's client at first glance appeared to be a loser.
The client rented tuxedos. Under the old tax law, he and Snyder calculated that the tuxedos should be depreciated over three years, a reflection of the real life and change of style. From a business executive's point of view, the general rule is, the faster the depreciation schedule, the greater the tax benefits.
The new tax bill, however, made no mention of tuxedos. Instead, the measure declared that any item not mentioned specifically in the new depreciation schedule automatically falls into the five-year class, apparently making the client a net loser from the tax bill.
On futher examination, however, it became quickly apparent that the owner of the tuxedo rental business would benefit significantly from a change in the investment tax credit he could take on his tuxedo purchases. The credit grew from 3 1/3 percent to 10 percent. According to Snyder, this brought the client back up to par from a tax standpoint.
Finally, bringing the client over the top was a provision in the tax law allowing companies making depreciable investments to take a half-year deduction even if the investment is made only for a smaller portion of the year. Snyder advised the client to buy his new tuxedos in December, a step that gave him the full investment tax credit for the entire year and depreciation for half a year.
In most cases, these steps were not necessary. A check of Washington-area accountants found each one noting that their wealthiest clients--those whose tax rates are currently close to the 70 percent ceiling--are looking forward to a major break next year when the top rates are dropped in one step to 50 percent.
"The biggest savers are the people in the top brackets," said Dooly Mitchell, executive partner in the firm of Councilor, Buchanan & Mitchell, and for these affluent clients the major problem is finding a way to postpone income from the current year into 1982 in order to capitalize on the reduced rates.
Mitchell said he is telling his clients in these tax brackets to shift from money funds into short-term bonds so that income will be generated in 1982, to speed up charitable and other deductible contributions so that they can be taken this year to reduce tax liability when rates are high, and to postpone payment of bonuses to executives to shift the income into 1982.
In a similar vein, Barry Goodman of Leopold and Linowes said the sharp drop in rates makes investments in tax shelters attractive in the current year. In fact, a number of accountants said that despite the claim of the administration that the tax bill would result in lessened interest in tax shelters, the rate cut from 70 to 50 percent, and the 5 percent cut effective Oct. 10 and 10 percent cuts effective on July 1 of the next two years make shelters for many taxpayers an inviting investment.
Goodman is also a strong supporter of the leasing provisions allowing corporations to sell their tax breaks. He is working with one client who is trying to set up a firm to act as a middleman between corporations seeking to sell their tax breaks and those seeking to buy them. "People are saying, 'Here are some freebies. How do we take advantage of them?' "
The tax bill provided major breaks for businesses, but local accountants noted that the breaks are likely to be less beneficial for Washington than for other, highly industrialized sections of the country.
The cuts generally are tied to capital investments, but much of the business in Washington is service-oriented -- consulting firms, lawyers, accountants -- not capital-intensive, and consequently will not get as large reductions.
Raymond E. Lang, of the firm bearing his name, said many of his clients "have been sort of surprised. They've been led to expect these great goodies . . . But we find that most of our clients are people-intensive, not capital-intensive." When asked "what goodies?" the answer was in most cases "damm little."
The estate-tax provisions in the tax bill already are producing a considerable amount of business for accountants, particularly as clients seek to rewrite their wills to get the most advantageous breaks. Some accountants believe, however, that the provisions are so beneficial to large estates that they could result in a loss of business as fewer persons are liable for federal estate taxation.
Under the law in effect through the end of this year, wills involving very large estates generally were structured to give the surviving spouse $250,000, or half the estate, whichever was larger, because that was tax-free. Commonly, the rest would be left in trust to the children, with the income from the trust going to the surviving spouse until his or her death.
Under the new provisions, wills are being altered, in many cases, to leave all of the estate to the surviving spouse except the amount that is tax-free, which would be put in a trust. This is being done because, under the new law, the entire bequest to a surviving spouse will be tax free, and the exemption will be raised steadily until it reaches $600,000 in 1987. This general strategy varies with individual situations.
One of the more generous items in the measure was the lowering of the capital gains rate--the income tax rate charged on profits from long-term investments such as Lang's client's business--from 28 percent to 20 percent.
In one of the quirks of the tax-writing process, the effective date for the capital gains reduction was set at June 9, 1981. Many of the major provisions of the business tax cut--including the basic change in depreciation, called the accelerated cost recovery system, a controversial leasing section that allowed companies to buy and sell tax breaks--were made retroactive to Jan. 1.
But in the case of the capital gains tax cut, the date was set on the same day that President Reagan introduced a revised version of his tax bill, June 9. It was a decision that cost Lang's client $1.6 million. At 28 percent, the tax amounted to $5.6 million; if it had been made retroactive to Jan. 1, the tax would have been $4 million.
"He's sort of bitter about it," Lang noted.