Corporate Estimated Taxes

Code Section 6655

By: Stephanie Shields

Introduction

Mandatory estimated taxes for C Corporations with tax liabilities of $500 or more.

Estimated taxes paid in four quarterly payments.

Calculating Required Payments

Step 1: Estimate the corporations income for tax year at issue

Step 2: Calculate the tax liability Estimated tax liability includes corporate

income tax, alternative minimum tax, environmental tax, and the gross transportation tax.

Computing Quarterly Liability

Section 6655 allows four safe harbor methods to compute quarterly estimated tax liability.

Proper use of one of the four safe harbor’s protects the corporate taxpayer from underpayment penalty.

Safe Harbor Methods

Current Year Safe Harbor

Preceding Year Safe Harbor

Annualized Income Method

Seasonal Income Method

Current Year Safe Harbor

Estimate current year tax liability Required installment payment is 25% of

estimated current year tax liability.

Example: ABC Corp.., a calendar year tax payer, estimates its tax liability for the year 2000 to be $300,000.

Required Quarterly Payment: $300,000 x .25=$75,000

Preceding Year Safe Harbor

Estimated taxes based on the preceding year’s tax liability as shown on the corporate return.

Required payment is 25% of the preceding years tax liability.

Previous year’s return must have a positive tax liability.

Easiest method to apply

Annualized Income Method

Actual taxable income used to make estimated payments.

Use of standard set of monthly periods:– 1st Installment: Use 1st three months of tax year– 2nd Installment: Use 1st three months of tax year– 3rd Installment: Use 1st 6 months of tax year– 4th Installment: Use 1st 9 months of tax year

Required Installment %’s

Required Installment

1st

2nd

3rd

4th

Applicable %

25%

50%

75%

100%

Example

ABC Corp.. decides to use the Annualized Income Method. For the 1st quarter installment ABC’s taxable income is $80,000. ABC’s 1st installment:

Annualized Income: $80,000 x 12/3 = $320,000

Estimated Tax Due: $108,050

Installment Due: $108,050 x .25 = $27,013

Seasonal Income Method

Estimated tax based on seasonal income Seasonal Income:

– Look to the three preceding tax years– Avg. of 70% or more of total income for the

year earned for any period of 6 successive months

Due Dates

Calendar Year Taxpayer April 15 June 15 September 15 December 15

Payments are credited against unpaid installments in the order they were required to be paid.

Fiscal Year Taxpayer

Due the 15th day of: 4th month 6th month 9th month 12 month

Underpayments

Amount of underpayment is the amount paid less than the required payment as calculated by one of the methods.

Penalty for underpayments Exceptions caused by certain tax

legislation

Penalty for Underpayment

Penalty equals the amount of interest that accrues on the underpayment.

Interest rate equals the Federal short term rate + 3 percentage points.

Interest is compounded daily. Underpayment period equals due date of

underpaid installment until the day it is satisfied.

Overpayments

Can be applied to next year’s tax. Applied in the order in which the

payments are required to be paid. Quick Refund for overpayments that are at

least $500 & at least 10% of the expected tax liability.

ANY QUESTIONS?

Thank You!