Sometimes the tax law seems to say something clearly—only we find elsewhere in the Internal Revenue Code that clarity is overridden. In News Release IR-2018-99 the IRS explains how a rate that, per the Tax Cuts and Jobs Act, took effect for tax years beginning in 2018 actually affects most years beginning any time after January 1, 2017.
The New Release outlines the rate that will be paid by fiscal year corporations for the corporation’s year that includes January 1, 2018. Act Section 13001(a) of Pub. L 115-97 (the law generally referred to as the Tax Cuts and Jobs Act) provides that the 21% flat rate version of IRC §11 takes effect “for tax years beginning after December 31, 2017.”
Based on that language, a corporation with a November fiscal year would appear to not get the flat 21% rate until its year beginning December 1, 2018, a full eleven months after calendar year C corporations had moved to the flat rate.
But there is an IRC section that overrides the effective date of a law in a case like this—IRC §15. That provision provides:
(a) General rule
If any rate of tax imposed by this chapter changes, and if the taxable year includes the effective date of the change (unless that date is the first day of the taxable year), then--
(1) tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year; and
(2) the tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.
Thus, this provision ends up with a very different result than if the rate had really applied to the first taxable year beginning after December 31, 2017.
The news release describes how this affects the computation of a fiscal year’s corporation tax for the affected year:
Corporations determine their federal income tax for fiscal years that include Jan. 1, 2018, by first calculating their tax for the entire taxable year using the tax rates in effect prior to TCJA and then calculating their tax using the new 21 percent rate, subsequently proportioning each tax amount based on the number of days in the taxable year when the different rates were in effect. The sum of these two amounts is the corporation’s federal income tax for the fiscal year.
The blended rate applies to all fiscal year corporations whose fiscal year includes Jan. 1, 2018. Fiscal year corporations that have already filed their federal income tax returns that do not reflect the blended rate may want to consider filing an amended return.
Of course, just to confuse matters even more, sometimes Congress has provided in an enacted bill that IRC §15 does not apply to a particular rate change. But such language was not included in the Tax Cuts and Jobs Act.