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Corporate income tax opportunities for maximizing cash flow.

Under regular refund procedures, a corporation cannot receive a refund for overpaid tax until a return is filed. When a corporation files for an extension of time to submit an annual income tax return, the time for receipt of refund will be further delayed. However, a special provision allows a corporation that overpays estimated income taxes to apply for a quick refund immediately after the close of the tax year.

The application is Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. The overpayment is the excess of estimated tax that the corporation paid during the tax year over the final income tax liability expected when the annual income tax return is filed. The refund is based on the excess of estimated tax payments over the total tax estimated to be due (not a percentage of estimated tax liability on which the earlier estimated tax payments were made).

The application must be filed no later than the fifteenth day of the third month after the corporation's tax year-end and before the corporation files an income tax return. The IRS will pay the refund within 45 days from the date the application is filed, except when material errors and omissions are found. However, in order to qualify for this refund, the estimated tax overpayment has to be at least (1) 10% of the expected income tax liability for the tax year and(2)$500.

The corporate tax return can be prepared as usual (including extensions) after the quick refund application has been filed. This will not affect the receipt of the estimated tax refund. Note that the estimated taxes refunded generally are treated as if never paid if later estimated tax penalties arise. If the final return shows a balance due, estimated tax penalties will be imposed and the Service may impose a late payment penalty.

An immediate cash flow benefit can be obtained by postponing some or all of the 1992 corporate taxes otherwise payable during 1993, if is estimated that a loss will occur in 1993. This includes income, accumulated earnings and personal holding company taxes. Further, the postponed amount may never have to be paid if the estimate of the 1993 loss turns out to be accurate.

Generally, the cash flow benefit of a net operating loss (NOL) does not become available until (1) after the end of the loss year, when the amount of the loss has been calculated and a return has been filed; (2) a claim for refund of taxes paid for a prior year is filed and processed by the IRS; and (3) a refund check is received from the Service.

However, a special provision may permit an acceleration of tax benefits associated with an NOL. It can be used only if all or part of a previous year's corporate tax remains unpaid. For example, if it becomes apparent before Mar. 15, 1993 (the due date for filing a calendar-year corporation's return) that 1993 is likely to be a loss year, the expected 1993 NOL can be used to postpone part or all of the required Mar. 15, 1993 payment of the 1992 tax liability.

It is essential to note that this procedure cannot be used for any 1992 taxes that have been paid or are past due. In that case, the corporation will not get a refund until 1994, after its 1993 return and a claim for refund or tentative refund claim (Form 1139, Corporation Application for Tentative Refund) are filed. Thus, as to remaining 1992 taxes that need to be paid, a determination should be made before Mar. 15, 1993 for a calendar-year corporation, or before the due date for filing corporate fiscal-year returns.

To use this provision, a statement must be filed with the IRS before paying the taxes to which the extension relates. The statement should include (1) the estimated amount of the expected NOL; (2) the reasons for the expected loss; and (3) the amount of the expected reduction in taxes attributable to the carryback of the current year's expected NOL.

In general, the amount of the unpaid tax liability for 1992 that can be delayed under this special provision is limited by the amount of refund that would be claimed by a carryback of the estimated loss for 1993 under the normal procedures. Note that interest will be charged on taxes postponed.

If, after filing this statement, it appears that the expected loss will be greater or smaller than originally estimated, a revised statement should be filed. However, 1992 taxes already paid may not be recovered by filing a revised statement showing greater estimated loss.

If this postponement procedure is used, Form 1139, covering the loss for 1993, should be filed by the end of the month in which the 1993 return is required to be filed. The IRS will apply the 1993 NOL to the postponed 1992 tax liability and will refund any remaining taxes overpaid along with any interest due.
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Article Details
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Author:Woolf, Steven
Publication:The Tax Adviser
Date:Apr 1, 1993
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