Due to a provision in the recently enacted Tax Cuts and Jobs Act (TCJA), a corporation with a fiscal year that includes January 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under the TCJA that would generally apply to taxable years beginning after December 31, 2017.
Fiscal year corporations that have already filed their federal income tax returns that don’t reflect the blended rate may want to consider filing an amended return.
IRC Section and Regulation
- Notice 2018-38 2018 – Fiscal-year Blended Tax Rates for corporations
- IRC Section 11 – Tax imposed
- IRC Section 15(a) – Effect of changes; general rule
Under Section 15(a) corporations determine their federal income tax for fiscal years that include January 1, 2018. They first calculate their tax for the entire taxable year using the tax rates in effect prior to TCJA, then calculate their tax using the new 21 percent rate – subsequently proportioning 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 proportioned amounts is the corporation’s federal income tax for the fiscal year.
Example: Corporation X uses a June 30 taxable year. For its taxable year beginning July 1, 2017, and ending June 30, 2018, X’s taxable income is $1,000,000.
|1. Tax amount prior to TCJA||340,000|
|2. Number of days prior to 1/1/18||184|
|3. Multiply Line 2 by Line 3||62,560,000|
|4. Tax amount using new @1% rate||210,000|
|5. Number of days after 12/31/17||181|
|6. Multiply Line 5 by Line 6||38,010,000|
|7. Divide Line 4 by 365 (184 _ 181)||171,397|
|8. Divide Line 7 by 365||+ 104,137|
|9. Sum of Line 7 and line 8 is the tax =||$275,534|
- Check for an Amended Return: Verify blended rate calculation.
- No amended return:
- Multiply taxable income amount by the applicable tax rate prior to TCJA. If this is the amount of tax paid, recalculate tax due using blended rates.
- If not the above, then multiply taxable income by 21% (TCJA rate). If this is the amount of tax paid, recalculate the tax due using blended rates.
- If neither a or b, verify blended rate calculation.