The IRS has issued guidance on the changes to the federal income tax rates for corporations under Code Sec. 11(b) and the repeal of the alternative minimum tax (AMT) for corporations by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), and on the application of the Code Sec. 15 tax proration rules in determining the federal income tax and AMT of corporations for a tax year that begins before January 1, 2018, and ends after December 31, 2017.
The TCJA eliminated the graduated corporate income tax rate structure, and provided for a flat 21-percent corporate income tax rate for tax years beginning after December 31, 2017. The TCJA also repealed the AMT for corporations for tax years beginning after 2017. Prior to the repeal, a corporation’s tentative minimum tax for the tax year was 20 percent of the alternative minimum taxable income (AMTI) for the year that exceeded the exemption amount, reduced by the AMT foreign tax credit for the tax year.
Code Sec. 15 provides rules for the proration of a tax rate change that takes effect on a day during the taxpayer’s tax year, other than the first day of the tax year. In such a case, tentative taxes are to be computed by applying the rate for the period of the tax year before the effective date of the change, and the rate for the period of the tax year on or after such effective date, to the taxable income for the entire tax year. The tax imposed on the taxpayer is the sum of the proportion of each tentative tax so computed which the number of days in each period, that is, the period before the effective date and the period on and after the effective date, bears to the number of days in the entire tax year. If a tax is repealed, the repeal is treated as a change of rate, and the rate for the period after the repeal for the purpose of computing the tentative tax for that period is zero.
Blended Tax Rate Guidance
Under the guidance, a corporation with a fiscal year that includes January 1, 2018, pays federal income tax using a blended tax rate and not the flat 21-percent tax rate under the TCJA that generally applies to tax years beginning after December 31, 2017.
Corporations determine their federal income tax for fiscal years that include January 1, 2018, by first calculating their tax for the entire tax year using the graduated 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 tax 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.
Other taxpayers, such as life insurance companies and regulated investment companies, which are taxed under other provisions that use the Code Sec. 11(b) tax rates, determine their tax for a fiscal year that includes January 1, 2018, by applying the Code Sec. 15 tax proration rules in the same manner as described above for corporations taxed under Code Sec. 11(b).
The repeal of the AMT for corporations by the TCJA is a change in the tentative minimum tax rate from 20 percent to zero for purposes of applying the tax proration rules. As a result, a tentative minimum tax of a corporation with a fiscal year including January 1, 2018, is computed by applying the 20 percent rate prior to the change, and a tentative minimum tax is computed by applying the zero percent rate resulting from the repeal of the AMT for corporations. The corporation’s tentative minimum tax for the tax year that includes January 1, 2018, is the sum of that proportion of each tentative minimum tax which the number of days in each period bears to the number of days in the entire tax year.
Comment. The guidance applies to tax years of corporations that begin before January 1, 2018, and end after December 31, 2017. Corporations with a fiscal tax year including January 1, 2018, that have already filed their federal income tax returns that do not reflect the blended tax rate may want to consider filing an amended return.