Because the TCJA changed the corporate income tax rates effective January 1, 2018, the IRS has issued Notice 2018-38, notifying C corporations that have a tax year which straddles that date that they must use a blended rate to calculate their regular tax liability for that tax year. This requires the corporation to follow these four steps:
- Calculate its first tentative tax by applying the old progressive tax rates to its total income for the tax year.
- Calculate its second tentative tax by applying the new 21% flat tax rate to its total income for the tax year.
- Multiply each tentative tax by the proportion of the straddle year to which each tax rate applies.
- Add the results of the two calculations.
A C corporation with a June 30 tax year-end has taxable income of $1 million. Using the four steps above, its first tentative tax is $340,000. Its second tentative tax is $210,000. The $340,000 is multiplied by 184/365 days to get $171,397. The $210,000 is multiplied by 181/365 days to get $104,137. Then,
$171,397 and $104,137 are added together for a blended regular tax liability of $275,534.
In addition to reducing the regular corporate tax rates, the TCJA also eliminated the alternative minimum tax (AMT) for C corporations. When a tax is repealed, Notice 2018-38 explains that the repeal is also treated as a rate change, with the rate for the period after the repeal being zero.
The same C corporation has AMTI (in excess of its AMT exemption amount) of $2,000,000. Using the same four steps above, its first tentative tax is $400,000. Its second tentative tax is $0. The $400,000 is multiplied by 184/365 days to get $201,644. The $0 is multiplied by 181/365 days to get $0. So the blended AMT tax liability is $201,644.