The IRS recently issued Notice 2018-38, which provides guidance for fiscal year companies on the application of the reduction in corporate tax rates to 21 percent and the elimination of the alternative minimum tax (AMT). The guidance applies to companies with fiscal years that include Jan. 1, 2018.
The guidance confirms that IRC Section 15, which applies a blended tax rate for tax years that straddle a tax rate change effective date, applies to the reduction in corporate tax rates and AMT included in the recent tax reform. Under the notice, regular tax is computed on a pro rata, per-day basis.
The notice provides the following example:
A corporation has a tax year beginning July 1, 2017, and ending June 30, 2018. This tax year includes 184 days before Jan. 1, 2018, and 181 days after Dec. 31, 2017. The corporation’s taxable income is $1 million. Assume a 34 percent tax rate in 2017 and a 21 percent tax rate in 2018.
Computation of Tax Liability
184 days in 2017 / 365 total days x $1 million x 34 percent tax rate = $171,397 tax for 2017
181 days in 2018 / 365 total days x $1 million x 21 percent tax rate = $104,137 tax for 2018
The total tax liability for the fiscal year ended June 30, 2018, is $275,534.
The notice also addresses the computation of corporate AMT for fiscal year filers, providing a similar pro rata, per-day approach for taxpayers to use to compute their AMT liability.
Continuing the previous example:
Assume the corporation determines that its alternative minimum taxable income in excess of any exemptions is $2 million. The AMT rate for 2017 before its repeal is 20 percent.
Computation of AMT
184 days in 2017 / 365 total days x $2 million x 20 percent tax rate = $201,644 tentative minimum tax
181 days in 2018 / 365 total days x $2 million x 0 percent tax rate = $0 tentative minimum tax
The total tentative minimum tax for the fiscal year is $201,644.
For its fiscal year the corporation will pay $275,534 – the greater of its regular tax liability of $275,534 or its tentative minimum tax of $201,644.
Corporate taxpayers should use this new guidance when computing estimated tax and extension payments. Taxpayers that already made estimated tax payments using 2017 tax rates may be able to reduce future estimated payments or use IRS Form 4466, “Corporation Application for Quick Refund of Overpayment of Estimated Tax,” to request a quick refund of estimated tax payments after their fiscal year-end but before their unextended due date.
The same computations also should apply to the built-in gains tax imposed on S corporations as well as to the unrelated business income tax paid by some tax-exempt entities.