On April 16, IRS issued guidance (Notice 2018-38) on how C corporations with a tax year that includes January 1, 2018 (but did not start on that date), will calculate their income tax liability in light of the Tax Cuts and Jobs Act (TCJA) rate change.
Prior to the TCJA, the tax imposed upon C corporations was based upon a graduated rate, beginning at 15 percent and ending at 35 percent of taxable income. Some corporations were also subject to the alternative minimum tax. Beginning January 1, 2018, the TCJA imposes a 21 percent flat tax rate upon all C corporation income. It also eliminates the corporate AMT.
In the April 16 guidance, IRS affirmed that IRC § 15(a) will apply to calculate a blended tax rate for a C corporation with a fiscal year that crosses from 2017 into 2018.
Under § 15(a), the tax rate for such a corporation is calculated proportionately, based upon the number of days in the corporation’s fiscal year to which each tax rate structure applies. The calculation is made by first computing the tax for the corporation’s fiscal year under the rate structure in place before the TCJA and then computing the tax using the 21 percent rate in place after the TCJA. Each of these tentative tax amounts is then multiplied by a proportion comprising the number of days to which that tax rate structure applies divided by the number of days in the entire taxable year.
The guidance specifies that the repeal of the corporate AMT is also considered a change of tax rate. In other words, the repeal is a change in the tentative minimum tax (TMT) rate from 20 percent to zero. This change is calculated proportionately under § 15(a) in the same manner as the change in tax rates are calculated.
Example (Adapted from Notice 2018-38)
Blended Corp. has a June 30 taxable year. For tax year ending June 30, 2018, it had taxable income of $1,000,000. Given these facts, Blended Corp.’s tax rate is calculated under IRC § 15(a) as follows:
- Blended Corp.’s tax calculated based upon pre-TCJA rates: $ 340,000
- Number of days in taxable year before TCJA effective date: 184
- Proportionate tax for pre-TCJA rates: (340,000 * 184/365) = $171,397
- Blended Corp.’s tax calculated based upon post-TCJA rates: $ 210,000
- Number of days in taxable year after TCJA effective date: 181
- Proportionate tax for post-TCJA rates: (210,000 * 181/365) = $104,137
- Total Tax for Blended Corp’s taxable year ending June 30, 2018 = $171,397 + $104,137 = $275,534