Blended Federal Income Tax Rate for Corporations with Fiscal Year

In a recent release by the Internal Revenue Service, corporations operating on a fiscal year that includes Jan. 1, 2018 will pay a blended federal income tax rate due to terms outlined in the Tax Cuts and Jobs Act (the Act).

Many corporations choose to use a fiscal year instead of a traditional calendar year for federal income tax reporting purposes. In this case, the recently-passed tax reform bill includes provisions for corporations that operate on a fiscal year as opposed to a calendar year. These provisions state that tax rates will be based on a blended federal income tax rate, not the Act’s 21 percent flat rate applied for tax years after Dec. 31, 2017.

If a corporation’s fiscal year includes Jan. 1, 2018, the blended federal income tax rate can be calculated by determining the corporation’s tax for the entire taxable year with the tax rates in effect prior to the Act. Next, the corporation will calculate its tax using the new flat 21 percent rate. In the final step, each tax amount is prorated based on the number of days in the taxable year when the different rates were in effect. The sum of these two amounts is the corporation’s federal income tax for the fiscal year.

This calculation applies to all corporations operating on a fiscal year that includes Jan. 1, 2018. According to the IRS, if a fiscal year corporation has already filed its returns and the rates do not reflect the aforementioned blended rate calculations, it may be advantageous to file an amended return.

The IRS also notes that the federal sequester law remains in effect for the 2018 federal fiscal year. Corporations need to be aware of how this law could affect their tax credit and refunds. It is also important to note that a similar proration will be necessary to determine the amount of a fiscal year corporation’s tentative minimum tax for the fiscal year that includes January 1, 2018.

If your corporation operates on a fiscal year, please contact your advisor with any questions on the blended federal income tax rate calculation.