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Fiscal Year Corporations Need to Do More Math to Calculate Both Their Regular and AMT Tax Liabilities

 

Fiscal Year Corporations Need to Do More Math to Calculate Both Their Regular and AMT Tax Liabilities

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:

  1. Calculate its first tentative tax by applying the old progressive tax rates to its total income for the tax year.
  2. Calculate its second tentative tax by applying the new 21% flat tax rate to its total income for the tax year.
  3. Multiply each tentative tax by the proportion of the straddle year to which each tax rate applies.
  4. Add the results of the two calculations.

Example:
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 When a tax is repealed, Notice 2018-38 explains that the repeal is also treated as a rate change, with the rate for the period after the repeal being zero.

Example:
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.

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Christenson_Crystal
Crystal Christenson, CPA, MST
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