The Tax Cuts and Jobs Act (TCJA) is one of the most comprehensive tax policy changes in decades. It includes a wide range of tax provisions that, among other considerations, have an interesting impact on fiscal-year-end corporations. In particular, the new corporate tax rate and the Alternative Minimum Tax (AMT) are areas corporate taxpayers will need to understand as we begin applying the new rules.
Prior to the TCJA, C Corporations were subject to a graduated corporate tax rate structure that ranged from 15% to 35%. The TCJA changed this scenario, creating one flat corporate tax rate of 21% for tax years beginning after December 31, 2017.
Under Internal Revenue Code (IRC) Section 15, corporations with fiscal year-ends will need to use a blended tax rate to calculate their tax liability for fiscal periods that include the date of the TCJA’s enactment. The blended tax rate is the sum of the two different rates prorated to each period based on the number days each period bears to the number of days in the entire taxable year.
In April 2018 the IRS issued Notice 2018-38 to provide further guidance on how to apply the new rate for fiscal-year corporations that include but do not begin on January 1, 2018. The Notice provides an example that calculates a tax liability under the old and the new rate and then prorates it for days before January 1, 2018, and after December 31, 2017. The liability of the corporation for the year is the sum of the two amounts. Below is the IRS example used in the Notice:
Corporation X, a subchapter C Corporation, 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 million and its AMTI in excess of its AMT exemption amount is $2,000,000.
Corporation X’s corporate tax under IRC Section 15 is as follows:
Taxable income $ 1,000,000
Tax using rates before the Act (184 days in the taxable year before January 1, 2018) 171,397
Tax using rate after the Act (181 days in the taxable year after December 31, 2018) 104,137
Corporate tax liability $ 275,534
Another change implemented by the TCJA was the repeal of the corporate AMT for tax years beginning after December 31, 2017. Previously, C Corporations were subject to an AMT rate of 20%. AMT paid was a tax credit that could be carried forward indefinitely and could offset regular tax in the future.
Under reform, for years beginning after December 31, 2017, and to the extent the AMT credits are not used to offset regular tax, 50% of the excess of the allowable credit for the year will be refundable. The refundable portion of the credit increases to 100% after December 31, 2020, which means any AMT credit will be either refunded or used at that time.
It’s interesting to note that AMT refundable credits are subject to sequestration pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985. The goal of the Act is to limit certain federal spending, and AMT credits are on the list of items to be sequestered. According to the IRS, corporations claiming refundable credits will be notified that a portion of their requested refund was reduced. For 2018 the rate of sequestration is 6.6%.
Notice 2018-38 addressed AMT along with the income tax rate change noted above. The Notice confirmed the repeal of a tax rate shall be considered a change of tax rate from 20% to zero and therefore subject to IRC Section 15. The tentative minimum tax (TMT) will be calculated by prorating the days each period bears to the number of days in the entire tax year. This is similar to the blended rate calculation for the corporate income tax rate change. The Notice uses an example that calculates a TMT for the entire year and then multiplies by the number of days before January 1, 2018, divided by the number of days in the taxable year. The TMT is then compared to the corporate tax liability to determine if the corporation has AMT liability. Below is the IRS example used in the Notice (same facts as above):
Corporation X’s AMT under IRC Section 15 is as follows:
Alternative Minimum Taxable Income in excess of AMT exemption amount $ 2,000,000
Number of days in Corporation X’s taxable year before January 1, 2018 184
Tax liability (no tax due because the amount is less than the corporate tax) $ 201,644
Fiscal year taxpayers should make sure they understand the calculation of the new rates. Most of the complexities addressed in this article are only relevant for the first fiscal year of tax reform. Going forward, the repeal of AMT and the flat corporate rate should simplify tax compliance for all C Corporations.
Please contact a member of your service team, or contact Andreana Shengelya at firstname.lastname@example.org for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
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