Computing corporate estimated tax for the year following S status.

• Author: Ellentuck, Albert B.

Facts

Taxco Corp. has been an electing S corporation reporting on the calendar year. In January 1992, the Taxco shareholders file a revocation of S status, effective for the corporate year beginning Jan. 1, 1992.

While advising Taxco of its new responsibilities as a regular corporation, Taxco's tax adviser notes that it will need to make quarterly corporate estimated tax payments on the 15th day of the fourth, sixth, ninth and twelfth months of its 1992 tax year. Taxco anticipates taxable income of about $400,000 for 1992, with the earnings expected to accrue ratably throughout the year as has occurred in prior years (that is, Taxco does not have seasonal income fluctuations). On its final S return for the calendar year 1991, Taxco reported S corporation taxable income of $50,000, but did not report a tax liability.

Issue

Under what method should a regular corporation compute its estimated tax payments when its prior year return was an S return?

Analysis

Every corporation subject to regular corporate income tax must make estimated tax payments during its tax year unless its actual tax for the year is less than $500; failure to do so results in an additional to the tax in the form of an underpayment penalty.

The underpayment penalty for insufficient estimated tax payments applies to tax years beginning in 1992 if the amounts actually remitted do not reach 93% of the tax shown on the return as filed for the corporate tax year (or, if no return is filed, 93% of the tax liability). (This percentage increased to 95% for tax years beginning in 1993 through 1996). However, two exceptions will negate this underpayment penalty. The underpayment penalty will not apply if the actual estimated payments exceed one of the following amounts:

1. The amount of tax shown on the return of the corporation for the preceding tax year, if a return showing a liability was filed by the corporation for the preceding year, and the preceding year was a tax year of 12 months, or

2. an amount equal to 93% of the tax for the current year computed by placing the actual taxable income as earned during the period prior to each quarterly estimated payment date on an annualized basis, or if smaller, 93% of the tax determined by annualizing current year-to-date income, using a percentage derived from the ratio of the prior three years' quarterly income to total income.

The first exception is not available for large corporations, defined as those having taxable income of $1...