The new corporate tax rate was the headline change made by this new tax law. That rate is, of course, a flat 21% on all taxable income. Not all businesses will realize a tax rate benefit from the new tax law changes.
The prior rules taxed corporate net income at only 15% for the first $50,000, with higher graduated rates beyond that amount. So a corporation with a taxable income of exactly $50,000 would owe $7,500 under the old graduated rates and $10,500 under the new 21% flat tax rules. That’s a 40% tax increase.
Corporations with taxable net incomes under $90,385 will have a higher federal tax liability going forward under the new law, and corporations with net incomes over $90,385 will have a lower federal tax liability.
One thing to consider in finalizing your cooperative’s 2017 tax return is if it makes sense to let your co-op pay tax on some income at the current lower 15% rates. If your co-op has a goal of building up permanent capital this may be a good year to add to reserves.
Another significant consideration is the tax rate your members will pay on any patronage dividends. We have a separate memo on the taxability of patronage dividends. It is very important to think about the total picture of the co-op’s rate and the recipients’ rates.
Financial Statement Effect – Deferred Taxes
For co-ops with formal financial statements the deferred tax calculation will need to be adjusted for the new corporate rate of 21%. Depending on previous rate assumptions this might result in an increase or in a decrease of the deferred tax amounts.
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About the Author
Bruce Mayer, MBA, CPA currently serves as a Partner in the Assurance Department, working primarily on audits and tax returns of cooperatives, nonprofits, employee benefit plans and commercial businesses. Bruce performs audits of all kinds and provides consulting services on taxation of nonprofits and cooperatives. Bruce enjoys helping clients solve problems and providing clients advice on accounting and tax strategies that meet their needs.