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IRS Confirms Blended Tax Rate for Corporations

In IR 2018-99 and Notice 2018-38, the IRS has confirmed that fiscal (non-calendar) year corporate taxpayers will apply a blended tax rate for fiscal years beginning before January 1, 2018 and ending after December 31, 2017 and not the flat 21% rate that generally applies under the Tax Cuts and Jobs Act (“TCJA”) to taxable years beginning after December 31, 2017.

Specifically, corporations will determine their “regular” federal income tax for fiscal years that include January 1, 2018 by (1) first calculating their corporate tax under IRC Sec. 11(b) for the entire taxable year using the tax rates in effect prior to the TCJA; (2) calculating their tax using the new 21% rate for the entire taxable year; and (3) then taking into account the tax amount in (1) and (2) proportionately based on the number of days in the taxable year during which the different rates were in effect.  The sum of these two amounts is the corporation’s regular federal income tax for the fiscal year. 

This methodology is consistent with the provisions of IRC Sec. 15, which addresses changes in tax rates during a fiscal year.  IRC Sec. 15 also applies to the corporate alternative minimum tax (“AMT”) under IRC Sec. 55, which is reduced from 20% to 0% under the TCJA for taxable years beginning after December 31, 2017. 

The Notice provides an example illustrating the application of this rule to the determination of the corporate income tax and AMT for a fiscal year taxpayer. 

Example:  Corporation X, a subchapter C (regular) corporation, uses a June 30 taxable year.  For its taxable year beginning after July 1, 2017, and ending June 30, 2018, Corporation X’s taxable income is $1,000,000 and its alternative minimum taxable income (“AMTI”) in excess of its AMT exemption amount is $2,000,000. 

Computation under IRC Sec. 11

(1) Taxable income (Line 30, Form 1120)   $1,000,000
(2) Tax on Line 1 amount using Sec. 11(b) rates before the TCJA 340,000
(3) Number of days in Corporation X’s taxable year before January 1, 2018 184
(4) Multiply Line 2 by Line 3  62,560,000
(5) Tax on Line 1 amount using the Sec. 11(b) rate after the TCJA 210,000
(6) Number of days in the taxable year after December 31, 2017 181
(7) Multiply Line 5 by Line 6 38,010,000
(8) Divide Line 4 by the total number of days in the taxable year 171,397
(9) Divide Line 7 by the total number of days in the taxable year 104,137
(10)  Sum of Line 8 and Line 9 $275, 534

Corporation X’s regular corporate tax for its taxable year ending June 30, 2018 is $275,534.

AMT Computation Under IRC Sec. 55

(1) AMTI in excess of AMT exemption amount (Line 9, Form 4626) 2,000,000
(2) Tentative minimum tax (“TMT”) on Line 1 amount using IRC Sec. 55(b)(1)(B)
rate  before the TCJA
400,000
(3) Number of days in Corporation X’s taxable year before January 1, 2018 184
(4) Multiply Line 2 by Line 3   73,000,000
(5) Divide Line 4 by total number of days in the taxable year  $201, 644

 

Taking into account the repeal of the corporate AMT by the TCJA, Corporation X’s TMT for its taxable year ending June 30, 2018 is $201,644.  Accordingly, since the TMT amount for the taxable year does not exceed Corporation X’s regular corporate tax amount of $275,534, Corporation X does not have an AMT liability for its taxable year ending June 30, 2018.

Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has over 35 years' experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international.

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