Guidance on Blended Tax Rates for Corporations with Fiscal Year-ends

The IRS issued further guidance on April 16, 2018 regarding blended tax rates for C-Corporations with a fiscal year-end.  The Tax Cuts and Jobs Act (TCJA) changed the graduated corporate tax rate to a flat tax rate.  This change is effective for taxable years beginning after December 31, 2017.  What about fiscal year-ends that include Jan 1, 2018?

For federal income tax purposes, a blended tax rate is to be used.  According to the IRS, the mechanics are as follows; first, calculate the corporation’s tax for the entire taxable year using the tax rates before TCJA.  Then, calculate the same tax using the new 21 percent flat rate.  After this is done, proportion each tax amount based on the number of days in the taxable year when the different rates were in effect.  The sum of these two amounts is the federal corporate tax for the fiscal year.

I know what you are thinking.  What about the alternative minimum tax?  The alternative minimum tax (AMT) was repealed for tax years starting after December 31, 2017.  Like the regular tax, the mechanics of the calculation are as follows; first, calculate the corporation’s AMT tax for the entire taxable year using the AMT rate before TCJA (20%).  Then, calculate same tax using the new 0 percent flat rate.  After this is done, proportion each tax amount based on the number of days in the taxable year when the different rates were in effect.  The sum of these two amounts is the corporate AMT tax for the fiscal year.

For further guidance and reference, please see the link below to the IRS website.

https://www.irs.gov/newsroom/many-corporations-will-pay-a-blended-federal-income-tax-this-year-under-the-new-tax-reform-law

If you have any questions please reach out to your Hertzbach advisor.

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