Fiscal-year Corporations Subject to Blended Tax Rates Following Tax Reform
The new 21% corporate tax rate allows C corporations to pay federal taxes at a significantly lower tax rate than the 35% top rate in prior years. While the new tax rate took effect beginning in 2018, this new benefit is delayed for C corporations with a fiscal-year end. If the company’s tax year begins on or before the effective date of 12/31/17, they will not be able to take full advantage of this tax reduction in the first year.
Calculating Blended Rates for Fiscal-Year Corporations
Fiscal-year corporations will be facing what the IRS calls a “blended rate” for 2018. This rate will be calculated by applying both the 2017 and new 2018 rates to taxable income for the entire year. The company will then multiply each calculated tax by the percentage of their fiscal year that each tax rate applies. They will then add the two tax amounts together to determine their total tax for the year. Below is an example:
Company X has $20 Million in taxable income and a September 30, 2018 fiscal year end. Company X should first calculate their tax based on their 2017 rates (20 million x .35= 7 million). This 7 million should then be multiplied by the percentage of days applicable out of their fiscal year (92/365 x 7 million= approximately 1.76 million). They should then calculate their tax using the new flat rate of 21% (20 million x .21= 4.2 million). This 4.2 million should be multiplied by the percentage of their fiscal year that the new rate applies (273/365 x 4.2 million= approximately $3.14 million). These totals should be added to arrive at Company X’s total tax of $4.9 million. Company X’s blended rate would be the total tax of $4.9 million divided by taxable income of $20 million to arrive at 24.5%.
Impact on C Corps
This blended rate calculation will result in fiscal-year corporations receiving some of the benefit of the lower tax rate in this first year. For all future years they will be taxed at the flat 21%.
It’s important to note for this blended rate year, deductions will be more beneficial since the tax rate is higher. That being said, these corporations may want to accelerate deductions into the current year.