Tax options to relieve dried-up cashflow.

• Author: Goldberg, Michael J.

Many companies are experiencing record losses due to a sluggish economy worsened by the September 11 terrorist attacks. Compounding matters, some of these companies have a tax liability payable at this time. Corporations have several tax planning options that they can use to generate much-needed cash.

Quick Refunds

Under Sec. 6425(a), a corporation can file Form 4466, Corporation Application to Quick Refund of Overpayment for Estimated Tax, to adjust an estimated-tax overpayment, rather than waiting to file for a refund on Form 1120. A taxpayer has to meet the following requirements to file Form 4466:

* It has to file Form 4466 before filing Form 1120;

* It has to file Form 4466 after the end of the corporate tax year, but before the 16th day of the third month after the end of the tax year; and

* The quick refund of the overpayment on the estimated tax has to be at least 10% of the expected tax liability and at least $500. Within 45 days, the IRS will issue the requested refund for a materially correct Form 4466.

Example 1: Due to recently declining sales, corporation XYZ adjusted its expected tax liability to $200,000 for the year ending Dec. 31, 2001. Throughout the tax year, XYZ had made estimated tax payments totaling $300,000. It also has an overpayment credit of $25,000 from the prior tax year. XYZ decides to file for a quick refund of the $125,000 between Jan. 1, 2001 and March 15, 2001, rather than waiting to file for the refund on its year-end return, which it expects to file after March 15, 2001.

Corporations applying for quick refunds should consider the safe-harbor rules. An excessive refund (as defined in Sec. 6655 (h)) would trigger underpayment penalties. In general, a corporation has to make four timely estimated tax installments, equal to 25% of the smaller of the current-year or prior-year tax liability. However, a "large corporation" (defined as a corporation with taxable income of at least $1 million dollars in any of the three preceding tax years) has to pay estimated tax equal to the current tax liability. Members of a control group (as defined in Sec. 1563) have to divide the $1 million among themselves. A large corporation can only base the first installment on the prior-year tax liability. It has to pay any deficiency with the second installment. A corporation cannot include net operating losses (NOLs) or capital loss carrybacks or carryovers when computing its taxable income.

Extensions and Penalties

Under Sec...