Many U.S. C Corporations elect to use a fiscal year end rather than a calendar year-end for federal income tax purposes. The IRS has confirmed through Notice 2018-38 that fiscal year end corporate taxpayers with tax years beginning before January 1, 2018 and ending after December 31, 2017 will apply a blended tax rate.
The tax rate for C Corporations prior to the Tax Cuts and Jobs Act (“TCJA”) utilized a tiered structure with the highest rate being 35%. The TCJA implemented a flat 21% rate going forward. The blended rate is calculated based on the number of days the fiscal year resides in each calendar year (2017 and 2018).
Tax Determination Steps
The tax is determined in four steps. 1) First calculating the corporate tax for the entire taxable year using the tax rates in effect prior to TCJA; 2) calculating the tax using the new 21% rate for the entire taxable year; 3) then taking the tax amounts in (1) and (2) proportionately based on the number of days in the taxable year during which the different rates were in effect; and 4) add the two totals together.
The same methodology is used for corporate alternative minimum tax, except step (2) will be $0 tax because the corporate AMT has been suspended with the TCJA.
See below for an example assuming a corporation had taxable income of $500,000 during the taxable year beginning July 1, 2017 and ending June 30, 2018.
|(2)||Tax before TCJA||178,250|
|(3)||Percentage of Days before 01/01/2018 (184 days / 365 days)||0.5041|
|(4)||Divide line (2) by line (3)||89,856|
|(5)||Tax after TCJA||105,000|
|(6)||Percentage of Days after 01/01/2018 (181 days / 365 days)||0.4959|
|(7)||Divide line (5) by line (6)||52,070|
|(8)||Total Tax for Fiscal Year ending June 30, 2018||141,926|
The Barnes Dennig Tax Team will keep you informed of any updates and changes as they occur, please reach out if you have any questions about the changes above, and a member of the tax team will contact you.