The Tax Cuts and Jobs Act calls for a 21-percent corporate tax rate beginning in 2018. The 2017 maximum corporate tax rate topped out at 35 percent. In addition, the 80-percent and 70-percent dividends-received deductions under current law are reduced to 65 percent and 50 percent, respectively. The Tax Cuts and Jobs Act also repeals the alternative minimum tax on corporations.
21-Percent Corporate Income Tax Rate
For tax years beginning after December 31, 2017, the graduated corporate rate structure is eliminated and corporate taxable income is taxed at a 21-percent flat rate. The new rate is permanent.
In 2017, according to taxfoundation.org the United States has the fourth highest statutory corporate tax rates among developed countries. With a worldwide average of just under 23 % the new Tax Act brings the United States to under the median.
What this means is that (hopefully) this will encourage companies to locate investment in the United States. The downside with a flat rate is that companies that have had net income of less than $50,000 (taxed at 15% in 2017) will actually pay a bit more in tax. However, as net income increases the more the savings over the previous tax law.
Alternative Minimum Tax (AMT) for Corporations
The alternative minimum tax (AMT) for corporations is repealed beginning after 2017. Any unused minimum tax credit of a corporation may be used to offset regular tax liability for any tax year. In addition, a portion of unused minimum tax credit is refundable in 2018 through 2021. The refundable portion is 50 percent (100 percent in 2021) of any excess minimum tax for the year over any credit allowable against regular tax for that year.
Repeal of the AMT allows some corporations to use certain tax benefits to effectively pay significantly below the new 21-percent rate.
Reduction of Dividends-Received Deduction
The 70-percent dividends-received deduction has been reduced to 50 percent, and the 80-percent dividends-received deduction is reduced to 65 percent.
Under present law, a corporation is generally allowed a deduction for dividends received from other taxable domestic corporations. The amount of the deduction is generally equal to 70 percent of the dividend received. Dividends subject to the 70-percent dividends-received deduction are taxed at a maximum rate of 10.5 percent (30 percent of the 35-percent top corporate tax rate).
The Tax Cuts and Jobs Act reduces the dividends-received deduction to reflect the new lower corporate tax rate of 21 percent. Dividends subject to the new 50-percent dividends-received deduction will be taxed at a maximum rate of 10.5 percent (50 percent of the 21-percent new corporate tax rate). Dividends subject to the new 65-percent dividends-received deduction will be taxed at a maximum rate of 7.35 percent (35 percent of the 21-percent new corporate tax rate).
If you have any questions regarding these modifications to corporate taxation or to tax reform in general, please call our office. We are here to assist you.