The maximum federal corporate tax rate was 35% some years ago. From Dec 31, 2017, however, the federal corporate tax rate was placed at 21 percent. This, however, applies to the corporation's fiscal year or firms that their tax year starting from Dec 31, 2017, and ended after that date. For instance, the blended rate applies for a year that begins 1/10/2017 and ends 30/09/2018
There is a notice 2018-38 from the IRS, which sheds light on applying the blended rate from tax Code section 15. This is also present in the IRS release 2018-99, which reveals that for every fiscal year affected, the blended rate applies.
The Calculation for Blended Rate
To calculate the blended rate, it is essential to compute taxable income. You will use the law guiding the income and deduction items for the Fiscal year in question. There are a couple of factors that affect the blended rate for this tax income amount. These are:
The days present before Jan 1, 2018
The number of days in the tax year after Dec 31, 2017
Let us use the example of a corporation with a tax year starting from Jul 1, 2017, to Jun 30, 2018. Since this is a U.S. corporation, all the taxable income is bound by the federal corporate income tax. If the taxable income for the year is $1,000,000, the blended rate will not apply to the firm's calculation of taxable income.
There are some rules guiding the corporation's year's taxable income. Some of these rules came into effect in 2017. The current rule, for instance, allowing the 100% bonus depreciation might bound tangible depreciable property. These are properties acquired after Sept 27, 2017, in the fiscal year. In this example, the current rule that does not allow deductions for net business interest expense above 30% of adjusted taxable income is invalid. This is because it only binds taxpayers starting from Dec 31, 2017.
At the old rate, the federal income tax on the firm's $2,000,000 taxable income will be $680,000 at the old rate (using 34%) and $420,000 at the new rate (using 21 percent). This tax amount gives a ratio of 184 to 181. It also stands for the number of days present in the tax year before Jan 1, 2018, and Dec 31, 2017.
Further Guidance
For a detailed outline of the blended rate calculation, IRS Notice 2018-38 provides more information. There is also information on blended rate calculation for corporate alternative minimum tax. Since the corporate alternative minimum tax is canceled for tax years starting from Dec 31, 2017, there will be a zero alternative minimum tax for the corporate alternative minimum tax blended rate calculation.
According to the notice as well, the blended rate computations apply to fiscal year corporations. Some examples are, life insurance companies & regulated investment companies (RIC) and these are companies in which the regular corporate income tax does not, somewhat, affect a separate federal income tax that uses the standard corporate tax rate.
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