Application of New Corporate Tax Rate to Fiscal Year Taxpayers/New Supplemental Withholding Rates

This blog discusses two issues raised by the tax rate changes in the recently enacted tax bill:  (1) how the new corporate tax rate applies to fiscal year (i.e., non-calendar year) corporations and (2) the new individual tax withholding rates on supplemental income.  The first topic is particularly important since it turns out the actual rule is different from what many of us expected the rule to be.

New 21% corporate tax rate applies on a prorated basis to fiscal year companies

The statute says the new 21% rate applies to taxable years beginning after December 31, 2017.  Many assumed this meant that a fiscal year taxpayer only got the benefit of the new rates with the fiscal year beginning in 2018.

It turns out, however, there is a special section of the Tax Code that provides that, in situations like this, the tax rate for the fiscal year that includes January 1, 2018, is computed on a basis that prorates between the old and new rates.  So, if, for example, the fiscal year ends March 31, a company uses a blended tax rate of (1) nine months at 35% and (2) three months at 21%, for a blended rate of 31.5%.

While this, of course, is good news in terms of immediately lowering tax rates, it also means that the strategy of shifting deductions into the fiscal year ending in 2018 is less valuable than it would be if the tax rate for that year were the full 35%.

New withholding rates for supplemental wages

Previously the withholding rates on supplemental wages were 39.6% for supplemental wages over $1 million and 25% for wages below that amount.  Reflecting the changes in individual rates, the IRS just released Notice 1036, which provides that the new supplemental rates are 37% and 22%.

David Gordon
Managing Director

Dave Gordon’s practice as an executive compensation consultant stretches back over a decade. He has covered a variety of industries, including extensive experience with financial institutions and utilities. In addition to engagements for his own clients, based on his years of experience as an executive compensation lawyer, he acts as the senior resource on numerous technical issues for the Firm. He frequently acts as an expert witness, where his prior background as a lawyer litigating executive compensation cases gives him a unique perspective when called upon to perform services as an executive compensation expert witness.