You may have heard about the dramatic cuts to corporate tax rates under the Tax Cuts and Jobs Act: top rates slashed from 35% to 21%. Wow!
But guess what? Many smaller corporations were not paying taxes based on the top rates, and for many of them the new law brings an increase in their taxes, in some cases as much as a 40% increase.
Here's a comparison of the old and new rates:
|Old Law||New Law|
|Taxable Income||Graduated Rates||Flat Rates|
|Up to $50,000||15%||21%|
|$50,001 - $75,000||25%||21%|
|$75,001 - $10,000,000||34%||21%|
The old law used graduated tax rates, so the first $50,000 of income was taxed at 15%, the next $25,000 was taxed at 25%, and so on.
If your taxable income was $50,000, you paid tax of $7,500; under the new flat rate of 21%, you will pay tax of $10,500. That's a 40% increase.
The next higher bracket will also see an increase. Under old law you would pay $13,750 on income of $75,000 ($50k x 15%, plus $25k x 25%). The new law will cost you $15,750, an increase of about 15%.
Turns out, you have to have taxable income of $90,400 or more before the flat rate tax at 21% gives you a better deal than the old graduated tax rates.