The IRS blended tax rate is the result of a provision in the Tax Cuts and Jobs Act (TCJA) in which a corporation with a fiscal year that includes January 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21% rate under the TCJA that would generally apply to taxable years beginning after December 31, 2017. IRS Notice 2018-38
What is the corporate tax under this blended tax rate?
To say that the “blended tax rate depends on…” is something of an oversimplification, to say the least. Page 3 of IRS Notice 2018-38 provides this information:
A tentative tax of a corporation for the taxable year that includes January 1, 2018 shall be computed by applying the rates of tax imposed under § 11(b) prior to the change of the tax rate under § 13001 of the Act, and a tentative tax for a corporation shall be computed by applying the 21 percent rate of tax imposed under § 11(b) as amended by § 13001 of the Act. The tax imposed under § 11 for the taxable year that includes January 1, 2018, is the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.
The Notice clarifies a bit stating that This notice applies to taxable years of corporations that begin before January 1, 2018, and end after December 31, 2017.
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Blended tax rate somewhat simplified
For the upcoming tax reporting (to be filed in 2019), corporations operating under a fiscal year rather than a calendar year, which includes January 1, 2018, will pay federal income tax using a blended tax rate. Other corporations reporting on a calendar year, will use the flat 21% tax rate that applies to the tax year beginning after December 31, 2017.
Corporations operating on a fiscal year will determine their IRS taxes for fiscal years that include January 1, 2018. This is, generally speaking, how their taxes are figured:
- Calculate tax for the entire tax year using the bracketed tax rates in effect before the TCJA,
- Calculate tax using the new 21% flat rate,
- proportionate each tax amount based on the number of days the different rates were in effect.
It should also be noted that the IRS urges fiscal year taxpayers that have already filed their IRS returns for the tax year that includes January 1, 2018, and did not show the blended rate, may want to consider filing an amended return.
How much can a fiscal year corporation expect to pay?
Of course, we can calculate those figures for you, but as an example, here are three Fiscal Year End Date applicable blended rates:
Examples of Blended Tax Rate Amounts
- Fiscal year end date of 01-31-18: 33.81%
- Fiscal year end date of 06-30-18: 28.06%
- Fiscal year end date of 12-31-18: 21%
Absolutely. The TCJA has opened a Pandora’s Box of questions, options, possibilities and opportunities for the business owner. The blended tax rate issue may seem easy when a chart appears, but knowing how these numbers work with your overall tax strategy can make or break whatever plans or goals you may have had.
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The bottom line
We specialize in business tax strategy. Without a tax plan, a flexible strategy and an overall business and life financial goal, you’re at the mercy of the IRS and the tax person who probably allows you to consistently file an extension. Most any tax person or bookkeeper can prepare a fairly accurate account of what happened last year. That is not tax planning.
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