If your business is a partnership, S corporation, or personal-service corporation whose tax year does not coincide with the calendar year, the new tax law contains good news and bad news. The bad news is that you'll probably have to switch to a tax year ending December 31. The good news is that you can spread the additional tax liability over a four-year period. Here's how it works:
Say your next tax year is scheduled to end July 31, 1987. Except in extraordinary cases, the new law will require you to move your year-end to December 31, 1987, so you'll have five extra months in the transition year. To cushion the impact, the law provides that only part of the income during this five-month "short" period will be taxed at next year's maximum individual rate of 38 1/2%. The rest will be taxed at 28%, the top rate for 1988 and beyond.
How could you take advantage of this wrinkle in the tax code? For one thing, you could incur your major 1987 expenses before next July 31. Then again, you might want to book as much income as possible in the short period. "If you use cash-basis accounting, what matters is when the check comes in the door," says Robert Haddad, a partner with Price Waterhouse in Boston.