C-Corporation Changes – Tax Cut & Job Act
Both C-Corps and their shareholders or owners are affected by the Tax Cuts and Job Act (TCJA) policy changes. Some major changes include the new flat inside C-Corp tax rate of 21%, elevation of AMT for C-Corps, and changes to NOL carrybacks and carryforwards. Taxpayers should be aware of the effect of these changes for the upcoming tax years.
Inside C-Corp rate
Before 2018 tax year, C-Corp tax rates ranged from 15% to 35%. TCJA changed the progressive tax rate structure to a flat rate of 21% effective January 1, 2018. Fiscal year taxpayers will use a blended rate method using both 2017 and 2018 tax year rates when filing their 2018 tax return.
Corporate Taxes on Dividends – Double Taxation
C-Corps are regarded as separate reporting and tax paying entities from its owners or shareholders. Taxable income for C-Corps is calculated and tax is paid before dividends are paid out to shareholders. Although, shareholders are not taxed on the total income of the corporation on the individual level, they are taxed on the dividend distributions they receive from the corporation. This creates a double taxation effect on the dividends paid to shareholders.
The rate at which the dividend is taxed on the individual level depends on the type of dividend and the individual taxpayer’s tax bracket. Ordinary dividends are taxed as ordinary income while qualified dividends are subject to capital gain tax rates ranging from 0%-20% depending on the individual’s tax bracket.
Under TCJA, dividend distributions will still be subject to double, but depending on the prior tax rates, you may be paying significantly more or less tax. In addition to the individual tax rates, the dividend distribution may also be subject to Net Investment Income Tax (NIIT) of 3.8% if an individual’s modified adjusted gross income exceeds certain thresholds ($200,000, $250,000 MFJ for 2018 tax year).
Elimination of AMT for C-Corps
For tax years beginning after December 31, 2017, corporate Alternative Minimum Tax (AMT) is repealed under TCJA. Prior to TCJA, large C-corps (greater than 5 million gross receipts test) faced AMT of 20% if AMT was greater than regular tax.
Under TCJA, the AMT carryforward credits may still be used to offset regular tax liability for tax years 2018 to 2020 and 50% is refundable. The carryforward must be taken before 2022, making 2021 the last year to take the credit wherein the credit is 100% refundable.
New Limitations on Utilization of NOL Carryforwards
The prior tax law allowed C-Corps to carryback an NOL for 2 years, and carry it forward for 20 years. Under TCJA, Net Operating Loss (NOL) carrybacks were eliminated if the loss was generated after December 31, 2017. Rather, the NOL will be carried forward indefinitely. In addition, the NOL carryforward for any given year is limited to the lesser of all NOL carryforwards or 80% of taxable income without NOL deduction. Any NOL created before January 1, 2018 are still subject to old carryback and carryforward rules.