Question

blue corporation owes federal income tax of $100,000 for the current year. for the last three years it paid federal taxes of $200,000 in each year.

A) is the corporation required to pay estimated taxes this year? Explain.

B) If yes, what are the due dates of the payments(don't assume it's a calendar year corporation)?

C) what is the minimum amount, if any the company must pay on each of those dates to avoid penalties?

Answer 1

Solution (A).

Businesses that file as a corporation generally need to make estimated tax payments if they expect to owe $500 or more in tax for the year. Here, in this problem Blue Corporation owes federal income tax of $100,000. Thus, Blue Corporation meets this minimum requirement and hence the corporation will likely have to file and pay estimated taxes on quarterly basis. Federal taxes paid in the last three years of $200,000 in each year would be ignorable in the present situation.

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Solution (B).

The installments generally are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day. If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty.

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Solution (C).

For Estimated Tax for Corporations, Form 1120W is used as a worksheet to figure each required installment of estimated tax. Here We will generally use one of the following two methods to figure each required installment. We should use the method that yields the smallest installment payments.

Method 1. Each required installment is 25% of the income tax the corporation will show on its return for the current year. i.e. 25% of $100,000 = $ 25,000.

Method 2. Each required installment is 25% of the income tax shown on the corporation's return for the previous year. i.e. 25% of $200,000 = $ 50,000.

However, To use Method 2:

1. The corporation must have filed a return for the previous year,

2. The return must have been for a full 12 months, and

3. The return must have shown a positive tax liability (not zero).

Also, If the corporation is a large corporation, it can use Method 2 to figure the first installment only.but in this situation the corporation is not a large corporation.

Hence in the present situation we will choose the minimum calculated amount, i.e. Method 1 as each required Installments payment of $25,000, the company must pay on each of those dates to avoid penalties