The Internal Revenue Service recently released confirmation that Section 15 of the Internal Revenue Code will apply to fiscal year corporations whose tax year “bridges” January 1, 2018 (the day that the new lower corporate income tax rate enacted as part of the Tax Cuts and Jobs Act became effective).
The information release IR-2018-99 was issued in mid-April and confirmed what many practitioners assumed to be the case – that is, that fiscal year corporations will pay tax based on a blended marginal income tax rate incorporating the portion of the taxpayer’s fiscal year occurring before and after the effective date of the new law. The release states:
Many U.S. corporations elect to use a fiscal year end and not a calendar year end for federal income tax reporting purposes. Due to a provision in the recently enacted Tax Cuts and Jobs Act (TCJA), a corporation with a fiscal year that includes Jan. 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under the TCJA that would generally apply to taxable years beginning after Dec. 31, 2017.
Corporations determine their federal income tax for fiscal years that include Jan. 1, 2018, by first calculating their tax for the entire taxable year using the tax rates in effect prior to TCJA and then calculating their tax using the new 21 percent rate, subsequently proportioning each tax amount 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.
The blended rate applies to all fiscal year corporations whose fiscal year includes Jan. 1, 2018. Fiscal year corporations that have already filed their federal income tax returns that do not reflect the blended rate may want to consider filing an amended return.
If you have questions and comments, please contact Bob Grossman or Don Johnston.
