Planning opportunities for community banks.

• Author: Tyler, Thomas J.

Along with loan quality and asset growth, minimization of tax liabilities ranks high on the list of priorities for community bankers. Although opportunities to permanently avoid taxes are limited, opportunities for deferring taxes are abundant. Deferring taxes into the future allows bankers the luxury of using funds that would otherwise not be available.

Estimated Tax Payments

In a perfect world, tax planning for the current year would be a continuous process that would begin well before its start. In the early stages of planning, nonrecurring transactions that may have an impact on earnings in the coming year should be identified. The purpose of identifying these transactions is to determine the most advantageous annualization periods to use in determining estimated tax payments for the current year. This often overlooked planning tool can affect cash flow significantly.

To avoid underpayment penalties, Sec. 6655(d)(1)(B) requires corporations to make estimated tax payments equal to the lesser of 100% of the current years tax liability or 100% of the prior years tax. The prior year tax exception is unavailable to corporations that had no tax liability in the preceding year or are considered large corporations (generally, corporations with taxable income in excess of $1 million in any of the three tax years immediately preceding the current year).

Unless the taxpayer elects otherwise, each installment is determined by computing the tax on annualized taxable income for the first three months of the current year for both the first and second required installments, the first six months for the third required installment and the first nine months for the fourth required installment. Sec. 6655(e)(2)(C) provides the taxpayer with an opportunity to elect, annually, different annualization periods to compute the required installments, Corporate taxpayers may elect to use one of the following additional annualization periods to determine the first, second, third and fourth installments respectively: the first two months, four months, seven months and 10 months, or the first three months, five months, eight months and 11 months. The election is made on Form 8842, Election To Use Different Annualization Periods for Corporate Estimated Tax, and is due on or before the due date of the taxpayers first installment. Once made, the election is irrevocable for that year.

The ability to elect different annualization periods provides opportunities to select...