Evening star., 1962-07-12

yearSfor at least the mex
three years.
The new rules also allow {
company to depreciate its as.
sets over a period even shorter
than the new guidelines. To OBJ.
tain approval. the company
must show that it replaces ma.
chinery and equipment fastel
than provided by the guide.
lines.
Faster replacement may bC
demonstrated through a com.
plicated formula called the IRE.
serve ratio test" This test
measures the relationship be.
tween useful lives claimed fo1
tax purposes and the actua
pace of asset replacement.
Even if a company fails Il
meet this test. it still may dem.
onstrate on the basis of les!
objective factors that its esti.
mate of useful lives is reason.
able in the light of actual re.
placement practice.
Challenge After 3 Years
IRIS may challenge use Of tn
new guild elin es after thre,
years. If it turns out that /.
company has not been replac.
ing assets as fast as contem.
plated by the guidelines, IRs
may require use Of a longer life
but no penalty will be imposed
for excessive depreciation ir
preceding years.
A company will be able tc
Justify continued use of the
guidelineS-or Of even shorter
lives-through the reserve ra-
ito test or through the less OBJ
jective factors. Even If the
company fails to meet the re-
serve ratio test, it will be al
lowed to continue using the
short lives for a period Of years
so long as it makes progress
in speeding up replacement OF
assets.
Although the new guidelines
are Is per cent shorter thar
actual depreciation used in the
past by large manufacturing
companies, the Treasury ex-
poets these companies to OBJ
tain even greater benefits un-
der the new system. BY justify
ing lives shorter than the new
guidelines, these companies
probably will depreciate 81 pei
cent faster than in the past.
Lesser Loss Expected
Depreciation deductions un.
der the old rules would total
$27.3 billion for the 1862 tar
year. the Treasury estimated
The new rules would allow an
increase in this total to $32
billion.
But some companies will ex-
erciSe their right to continue
under the old rules, so depre-
citation deductions are expect
ed to increase to only $30.7
billion. Even that $3.4 billion
increase would reduce tax liza
bilities by SIS billion, the
Treasury estimated.
The actual loss of revenue
will be less than SIS billion,
the Treasury expects, because
the new rules will stimulate
the economy's growth. Unoffi-
cially, the administration ex-
poets the revenue loss to total
$750 million or less this year.
No loss is expected in the fu-
ture.
Business investment is a key
element in the administrators
plans for boosting economic
growth. reducing unemploy-
ment, and making Unite d
States producers efficient
to compete for world
trade.
Investment has Jagged sub
stantially behind the admin
istration's goals, and some
American industries are obso-
lete compared with competitors
in Western Europe and else
where.
Business leaders blame the
investment lag mostly on low
profits. The steel industry, for
example, said it tried to raise
prices last April because high
ar profits were needed to pay
for investments. The President
forced the industry to cancel
the price increases.
Businessmen also have COM
planned for many years that
mrealistically tough deprecia-
ton standards cut down on
funds available for investment
and 50 forced them to delay
moderniZation and expansion
longer than was heaIthv