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Tax reform: blended corporate tax rate

corporate tax rate, tax reformBy now, we have all heard of the new Tax Cuts and Jobs Act (TCJA) signed by President Trump in December 2017 to take effect on January 1, 2018. I am sure you heard that individuals and corporations will get tax cuts through reduced tax rates, among other deductions available. In this blog, I will discuss the corporate tax rate reduction and treatment for 2018.

The old tax rate for corporations was a whopping 35%, which was the highest corporate tax rate in the world. TCJA has now changed the playing field and reduced the corporate tax rate to 21%. For calendar-year corporations (tax-year ending on December 31) this is great news and not much thought goes into stepping down into this lower tax rate. But, what of those corporations who have a fiscal year-end other than December 31? What rate do they pay?

This ushers in our discussion of a blended corporate tax rate. A provision in TCJA requires, per the IRS that “a corporation with a fiscal year-end that includes January 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21% that would generally apply to taxable years beginning after Dec. 31, 2017.”

Read more about how tax reform impacts you

How is this done, you ask? First, you calculate the percentage of days the fiscal year had in 2017 and the percentage of days the fiscal year had in 2018. Then, multiply the 2017 percentage by 35% and the 2018 percentage by 21%. The total of these two amounts is the corporate “blended” tax rate for the fiscal year. What?!

Let’s do an example for a corporation who has pre-tax income of $1 million dollars and their fiscal year ends in June 30, 2018.

 Number of days% Days allocationTax rate in effectEffective tax rate for period
July 2017 to December 201718450.41%35%17.64%
January 2018 to June 201818149.59%21%10.41%
Total36528.06%

Pre-tax income x blended tax rate = tax liability

Pre-tax income$1,000,000
Blended tax rate28.06%
Tax liability$280,575

Here are a few things to consider:

  1. If your corporation had deferred tax accounting, then your corporation is required to reverse the deferred tax assets and deferred tax liabilities at the rate to which these assets/liabilities are expected to reverse. This may be more likely at the 21% tax rate versus the blended rate.
  2. You will most likely use the blended rate for temporary differences that originated in 2017 and reversing in 2018.
  3. If a tax return was already filed for your fiscal year that does not reflect the blended rate, you may want to consider amending the tax return.

Remember to discuss this with your Henry+Horne tax advisor.

Sahar T. Clancy, CPA