Corporate year-end tax strategies developed in the last few months of this year can have broad implications for investing and purchasing strategies over the next several years, says David Greenwell, tax executive for the Ernst & Whinney accounting firm in Oklahoma City.
The most effective year-end tax planning is performed early enough to implement the strategies developed to reduce one's income taxes, Greenwell said, and 1987 is a transition year in the implementation of the 1986 tax reform legislation which substantially overhauled the tax system.
"Because of the upcoming decrease in the maximum corporate tax rate," Greenwell said, "1987 is a particularly good year to implement tax planning strategies.
"One obvious tax planning step in a transitional year of declining corporate tax rates is the deferral of income until 1988. For businesses that are required to use the accrual method, merely deferring cash receipts will generally not be enough to have that income taxable in 1988 instead of 1987."
However, there are steps which can be taken to achieve this deferral.
Income may be deferred by delaying the receipt of goods or by making sales on consignment or approval.
"These approaches," Greenwell said, "can delay billings, payments and income recognition. This same rationale - in reverse - applies to expenses. Generally you will want to accelerate as many expenses as possible into 1987 with its higher tax rates."
For example, Greenwell said certain charitable contributions can be made in 1987 which would normally be made in 1988. Another consideration is to accelerate the company's future retirement plan deductions by contributing the maximum deductible amount into qualified retirement plans in 1987.
Another method of accelerating expenses involves the acquisition of depreciable property.
The recovery period for most depreciable assets has been extended and for personal property, this longer period is sometimes offset by a more generous depreciation method. …