Tax Reform for Businesses: Tax Rates and AMT for C-Corporations
There has been a lot of buzz about tax reform changes and how they will affect companies in the coming tax years. Some of these changes include the reduction of the corporate and individual tax rates, the repeal of the corporate alternative minimum tax and higher individual alternative minimum tax exemptions for tax years beginning after December 31, 2017. Fiscal year corporations with tax years beginning on or before December 31, 2017 will have the benefit of a blended tax rate. Below we outline the previous law, what changed with the new law and how businesses will be impacted.
- The corporate tax rate originally had a graduated structure with the lowest rate at 15% and the highest rate at 35%
- The individual tax rate ranged from 10%-39.6% within seven tax brackets
- Individuals and Corporations were subject to Alternative Minimum Tax (AMT), which is a second tax system. The taxpayer’s tax liability for the year was equal to the sum of the regular tax liability plus the AMT liability for the year
- The corporate tax rate has been reduced down to a flat 21% for all C-Corporations
- The new law includes seven individual tax brackets ranging from 10%-37% for various taxable income thresholds
- AMT has been repealed for C-Corporations for tax years after December 31, 2017
- AMT credit carryovers may still be used to offset tax, and 50% of the excess of the AMT credit over the tax liability will be refundable to taxpayers for any tax year beginning after 2017. This is allowed from 2018 through 2020, and any remaining credit carryover still existing in 2021 will be fully refunded.
- After 2021, there will be no more AMT or AMT credits for corporations
- Did not repeal the AMT for individuals, but increased the exemption amounts for tax years 2018-2025 making it less likely to hit AMT at lower income levels. The exemption amounts are $109,400 for married filing jointly and surviving spouses, $70,300 for single filers, and $54,700 for married filing separately
Impact on Businesses
Entity Structure Changes
With these changes to corporate tax, many business owners might start asking, “Should I form a C-corp now?”, but there are important things to consider. The earnings of C-corporations are taxed twice, once when the income is earned and again when the income has been distributed to the shareholders as dividends. Before making a decision, contact an Anders advisor to discuss your specific tax situation and see if an entity structure change would be beneficial for you.
Holding Real Estate in a C-Corp
Although the corporate tax rate has been reduced and the corporate AMT repealed, the same drawbacks still exist for holding real estate in a C-Corporation. As real estate appreciates in value and is sold, the gains are double taxed, and even with the lower tax rate in place and no AMT, this double taxation should be considered when considering a change of entity to hold real estate.