The keystone of the Tax Cuts and Jobs Act is the drop in the corporate tax rate to a flat 21 percent, down from top rate of 35 percent. The U.S. used to have the highest corporate tax rate among developed countries; now the rate is about average, enabling U.S. corporations to better compete in the global marketplace.

New corporate rate

In the past, C corporations had a graduated tax rate system, with rates ranging from 15 percent to 35 percent. Effective for taxable years beginning after December 31, 2017, there is a single tax rate of 21 percent.

For most corporations, the new flat rate represents significant tax relief. However, for very small C corporations, meaning those with taxable income up to $50,000 that previously paid only 15 percent, the new flat rate represents a tax increase.

Blended rate for fiscal year corporations

If a C corporation has a fiscal year that includes December 31, 2017, then it must use a blended rate for its 2018 fiscal year. Essentially, the old graduated rates apply to the portion of the year prior to January 1, 2018, while the new flat rate applies to the portion of the year after December 31, 2017.

According to the IRS, the tax is the sum of that proportion of each tentative tax based on the number of days in each period relative to the number of days in the year. In other words, you don't have to look at actual taxable income for each portion; you apply the formula. For example, if a C corporation has a fiscal year ending June 30, and has taxable income of $1 million for its fiscal year 2018, its tax would be $275,534. This is figured by applying the graduated rates to $1 million, of which 184/365 of this tax applies. The flat rate of 21 percent is applied to $1 million, of which 181/365 of this tax applies. These sums are totaled for the tax reported on the corporation's 2018 tax return.

Looking ahead

Unlike many tax changes made by the Tax Cuts and Jobs Act for individuals which are temporary, the cut in the corporate tax rate is permanent. Of course, the U.S. Congress is always free to change this rate--up or down--in the future.

Published on: Feb 25, 2019
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