Corporate estimated tax requirements.

• Author: Schwartzman, Randy A.

In an effort to curb perceived abuses by corporate taxpayers trying to reduce or eliminate quarterly estimated tax payments for one or more quarterly installments, the IRS issued new proposed regulations under Sec. 6655 for corporations to use in computing quarterly estimated tax payments. Some of the more important requirements contained in the new regulations are discussed here.

Deferral Techniques

The new regulations address the perceived abuses, which included deferral techniques such as accelerating recognition of a net operating loss (NOL) carryover into the first installment period, treating bonus depredation as allocable to the installment period in which the qualifying asset is placed in service, and treating a liability-as incurred in the installment period in which the two-prong all-events test (i.e., liability is fixed and can be determined with reasonable accuracy) is met provided economic performance is satisfied by the end of the tax year (as opposed to an earlier date that more closely coincides with the end of the quarter for which the estimate was made).

Sec. 6655

Sec. 6655 imposes a penalty for the underpayment of estimated taxes by a corporation. Corporations that do not make required minimum payments when due are subject to a penalty that resembles interest. The penalty is equal to Sec. 6621's underpayment interest rate multiplied by the underpayment amount for that period. The underpayment amount for each quarter would be the excess of the "required installment" over the estimated tax actually paid.

The due dates depend on the taxpayer's fiscal year. Absent a first-quarter election to use different annualization periods, each required payment is generally due by the 15th day of the 4th, 6th, 9th, and 12th month of each fiscal year. The required annual payment for smaller taxpayers is generally equal to the lesser of the required quarterly percentage of 100% of the prior-year tax or 100% of the current-year tax based on an annualization of taxable income for the period (annualization method).

A "large corporation" can only rely on the prior-year tax liability for its first quarter. It is generally defined as having had taxable income of at least a $1 million before the application of an NOL carryback or carryforward in any of the prior three years.

Economic Performance Rules

Under the all-events test for income, a taxpayer recognizes income when all events have occurred that fix the right to the income and the amount of the income is determinable with reasonable accuracy. Under...