New estimated tax payment rules.

• Author: Withers, John

On Nov. 27, 1991, congress passed the Tax Extension Act of 1991, which extended various expiring provisions through June 30, 1992. The loss of revenue anticipated from these extensions (e.g., employer-provided educational assistance, health insurance deduction for self-employed, research and experimentaion tax credit, and low-income housing tax credit) by six months is $3.2 billion over five years. The Budget Act of 1990 imposed "pay-as-you-go" requirements for direct spending during fiscal years 1991-1995. Therefore, the Tax Extension Act of 1991 offset the lost revenue from the extended provisions by providing for accelerating estimated tax payments of certain corporate taxpayers.

Prior to the Tax Extension Act of 1991, corporations could satisfy either of the following two tests through estimated tax payments to avoid underpayment penalties.

1. The corporation could make four equal timely estimated tax payments that totaled 90% of the tax liability ultimately shown on the return. Instead of making equal payments, the corporation could base its estimated tax installments on its annualized taxable income.

2. If not a large corporation, the taxpayer could make four timely estimated tax payments, each of which equaled 25% of the tax liability ability for the preceding tax year. A large corporation (i.e., one that had taxable income of $1 million or more for any of the three preceding tax years) could use this rule only for its first quarterly payment.

   Effective for tax years beginning during 1992, corporations relying on test 1 will be required to base estimated tax payments on 93% (rather than 90%) of current year tax liability. The applicable percentage will be 94% in 1993 and 1994, and 95% in 1995 and 1996. The provision is scheduled to sunset for years beginning after 1996. (As this item was going to press, the applicable percentage was changed from 94% to 95% starting in 1993.)

   Test 2 was not changed by the Tax Extension Act of 1991.

   Individuals

   Also during November 1991, Congress approved extended benefits for long-term jobless workers and paid for the measure by changing the estimated tax payment requirements for certain individuals.

   Under prior law, for tax years beginning before Jan. 1, 1992, individuals could avoid underpayment penalties if they made four equal estimated tax payments that totaled either 100% of their prior year's tax liability (exception 1) or 90% of their current year's tax liability (exception 2). The 90% test...