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Computing corporate estimated tax for the year following S status.


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.


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


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 million or more for any of the three tax years preceding the estimated tax year; these entities are required to compute their quarterly estimates using the annualization calculation (although the first required installment for any year may be based on last year's tax). Also, all corporations must consider the alternative minimum tax in making their quarterly estimates.

The tax adviser immediately notes that the first of the exceptions would not be available to Taxco; this exception requires a prior year return showing a tax liability. Because Taxco filed as an S corporation for the 1991 tax year and paid no corporate tax, it is not eligible.

The remaining exception is also not helpful. Taxco's 1992 anticipated taxable income of $400,000 is expected to accrue ratably throughout the year. Accordingly, the annualization of actual quarterly income under the second exception would lead to the same quarterly tax estimates requirement as the general rule of 93% of actual tax.

Taxco does not have the capability of calculating its 1992 estimated tax payments on the basis of its 1991 lower taxable income. A corporation may use the prior year as the reference point only if the prior year return covered a 12-month period and reported a tax liability.


Taxco, in its first year following its final S return, faces an inflexible requirement for computing its quarterly estimated tax payments. The commonly used exception based on the prior year's tax is not available; accordingly, Taxco has no choice other than to monitor its actual taxable income throughout its first C return year and to compute quarterly estimates on actual year-to-date income (using the 93% current year rule). The tax adviser has advised Taxco of its ability to make this quarterly annualization computation using the lower of calendar quarter pro rata annualization or a seasonal factor based on the ratio of the three prior years' quarterly income to total income.
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Article Details
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Author:Ellentuck, Albert B.
Publication:The Tax Adviser
Date:May 1, 1993
Previous Article:Tax Division testifies on administration's tax proposal.
Next Article:Proposed S corporation regulations under Secs. 1367 and 1368.

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