This page relates exclusively to the 2018 tax law changes for taxable corporations (C-corps). Additional information relating to all business taxes is found here.
Under prior law, corporations were taxed progressively based on income at rates from 15% to 35%. (Actually, there were 38% and 39% rates at various levels of income, which effectively eliminated the lower brackets so that at high levels of income, corporations were taxed at a flat 35% from the first to the last dollar). Certain Professional Corporations were taxed at a flat 35% rate.
Under the new law, all corporations are taxed at a flat 21% rate, from the first dollar of taxable income (including Professional Corporations). Since there is now a flat tax, the corporation Alternative Minimum Tax was repealed. Also repealed was the Domestic Production Activity Deduction (DPAD).
Iowa retained DPAD for 2018. Iowa also left in place the $25,000 limitation on the Section 179 (fast write-off) deduction for equipment purchases in 2018. Update: The Iowa Legislature retroactively changed the Section 179 limit for corporations to $70,000 for 2018. Bonus depreciation is still not allowed for Iowa corporations. Additionally, like-kind exchange treatment of personal property is mandated in 2018 for Iowa corporations, and then couples with federal law beginning in the 2019 tax year. Numerous other changes are implemented in Iowa tax law from 2019 to 2023. Some are phased in, and some have ‘triggers’ that must be met for the changes to be implemented.
A corporation’s dividends received deduction is reduced. Dividends formerly allowed a 70% deduction is reduced to 50%, and dividends formerly allowed an 80% deduction is reduced to 65%. Corporations that may use the cash method of accounting has expanded.
Observation: A flat tax at 21% actually imposes a higher tax on small corporations with little income. In fact, Iowa accrual-based corporations would have to have nearly $97,000 in taxable income before the flat rate results in less tax than the former graduated rates.
There are numerous changes intended to bring production and business activity back to US soil for multi-national corporations. If the rate reductions and other changes don’t result in additional taxable corporate income, the changes are expected to reduce federal revenues by $1.35 trillion over 10 years.