As we are all aware, the most comprehensive tax reform in over 30 years was signed into law December 22, 2017. Most of the new tax provisions are “effective” for taxable years beginning after December 31, 2017. Tax professionals are still awaiting guidance on how many of these provisions’ will actually be applied.
Arguably one of the biggest revisions resulting from the new tax bill was the reduction in the corporate tax rate to a flat 21%. This new law, as with most of the new provisions, per the new bill’s language is effective for taxable years beginning after December 31, 2017. How this law applies to fiscal year taxpayers, however, was unclear or unaddressed.
The new law, however, does not change IRC Section 15 which calls for the use of a “blended rate” for tax years in which there is a rate change. This calculation is performed by dividing the year end taxable income into two components; a pre rate change component and post rate change component based on a pro rata portion of the number of days in each period. Each component percentage is then multiplied by the total taxable income for the full fiscal year multiplied by the rate for that period. The components are added together to determine the taxpayer’s total tax liability for the full tax year.
What does this mean? Fiscal year taxpayers with tax years ending in 2018 will see a decrease in estimated tax payments and their overall tax liability for the 2017 tax filing! Consult your tax advisor for questions and further guidance.