Understanding the Corporate Flat Tax and Its Impact on Small Corporations

The biggest economic provision contained in the Tax Cuts and Jobs Act for Corporations was the change to a flat tax rate of 21% for Corporations filing Form 1120 – U.S. Corporation Income Tax Return. Previously, the tax rates for a C Corporation was 15% on the first $50,000 of taxable income; 25% on the next $25,000 of taxable income, 34% on taxable income between $75,000 and $10,000,000 and 35% on all taxable income above $10,000,000.

The new rate of 21% on all taxable income went into effect on January 1, 2018. Fiscal year corporations with tax years year beginning in 2017 and ending in 2018, will pay a blended tax rate when they file their 2017 Form 1120. The blended tax rate is based on the number of days that the corporation’s fiscal year is in 2018.

For corporations that previously were paying taxes on large amounts of taxable income, the replacement of the graduated tax with the 21% flat tax will result in significantly lower taxes. This tax reduction for corporations has been widely publicized and most owners of corporations are expecting to see a lower tax burden this year. However, not all corporations will see a lower tax bill in 2018, because many smaller corporations have not historically paid these higher tax rates.

Specifically, a corporation that has taxable income of less than $90,381 will experience a tax increase in 2018 by paying a flat tax of 21% on their taxable income as compared to the previous graduated tax rates. This occurs because previously the corporation only paid 15% on the first $50,000 of taxable income and now they will be paying the higher rate of 21% on that same level of income. Any corporation with taxable income in the old 15% tax bracket will see a tax increase on the income in that range.

The table below shows the break-even point for comparing the old 2017 graduated tax rates and the new 21% flat corporate rates. Tax professionals should be aware of this break-even analysis because many owners of a corporation with income under the break-even point may not be aware that their corporation will have a higher tax burden in 2018.

 

Pre-TCJA Tax RateTaxable IncomeTax @ Pre-TCJA RatesTax @ 21%
15%$50,000.00$7,500.00$10,500.00
25%$25,000.00$6,250.00$5,250.00
34%$15,381.00$5,229.54$3,230.01
Total$90,381.00$18,979.54$18,980.01