Overview of Tax Reform Impact on Corporations
Last year’s tax reform legislation replaced the graduated corporate tax structure with a flat 21 percent corporate tax rate. This new maximum tax rate for corporations is effective for tax years beginning after December 31, 2017.
Blended Tax Rate for Fiscal Year Corporations
A corporation with a fiscal year that includes January 1, 2018, will pay federal income tax using what is called a blended tax rate. They will not use the flat 21 percent tax rate for their entire fiscal year.
Steps to Calculate the Blended Tax Rate
Corporations must follow these steps to compute their blended rate:
- Calculate their tax for the entire taxable year using the tax rates that were in effect prior to the Tax Cuts and Jobs Act.
- Calculate their tax using the new 21 percent rate.
- Proportion each tax amount based on the number of days in the taxable year when the different rates were in effect.
- Sum these two amounts — this total is the corporation’s federal income tax for the fiscal year.
Applicability
- The blended rate applies to all fiscal year corporations whose fiscal year includes January 1, 2018.
- Fiscal year corporations that have already filed their federal income tax returns without reflecting the blended rate may want to consider filing an amended return.
Impact on Tax Forms and Instructions
This change will affect many tax forms and instructions that corporations use.
Frequently Asked Questions
What is the new corporate tax rate under the tax reform?
The tax reform replaced the graduated tax system with a flat corporate tax rate of 21%, effective for tax years starting after December 31, 2017.
Who must use the blended tax rate?
Corporations with a fiscal year that includes January 1, 2018, must use a blended tax rate instead of the flat 21% for that fiscal year.
How is the blended corporate tax rate calculated?
To calculate the blended rate, corporations determine their taxes using both the old and new rates, prorate each based on the number of days each rate was applicable, and then sum the results.
Should corporations amend returns if the blended rate wasn’t applied?
Yes, fiscal year corporations that filed without using the blended rate may consider amending their tax returns to reflect the correct calculation.
How does this tax reform affect corporate tax forms?
The change to the corporate tax structure affects multiple tax forms and instructions, requiring updates to ensure accurate reporting under the new tax regime.