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Change in Corporate Tax Rates

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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