With the next quarterly estimated tax payment deadline on June 17, it’s essential for both individuals and businesses to understand the rules for computing corporate federal estimated payments. Ensuring your business pays the minimum amount of estimated tax without triggering penalties for underpayment is crucial. Here’s a comprehensive guide to help you navigate the options and make informed decisions.

Four Possible Options

To avoid penalties for underpayment of estimated tax, a corporation must pay the lowest amount determined under one of the following four methods:

1. Current Year Method

• Pay 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of the four installment due dates.
• Corporate due dates are generally April 15, June 15, September 15, and December 15.
• If a due date falls on a weekend or legal holiday, the payment is due the next business day.

1. Preceding Year Method

• Pay 25% of the tax shown on the return for the preceding tax year by each of the four installment due dates.
• For 2022, certain corporations with taxable income of $1 million or more in any of the last three tax years can only use this method for their first required installment.
• This method isn’t available to corporations with a tax return for less than 12 months or without a preceding year return showing some tax liability.

1. Annualized Income Method

• Pay “annualized tax” in quarterly installments.
• The annualized tax is based on the corporation’s taxable income for the months in the tax year ending before the due date of the installment, assuming income will continue at the same rate throughout the year.

1. Seasonal Income Method

• Suitable for corporations with recurring seasonal income patterns.
• Income is annualized based on the assumption that income earned in the current year is earned in the same pattern as in preceding years.
• This method involves a complex mathematical test to qualify. Professional assistance is recommended to determine eligibility.

Switching Methods

A corporation can switch among the four methods during a given tax year, allowing flexibility to optimize tax payments and avoid penalties.

Consult with a Professional

Determining the best method for your corporation can be complex. If you need assistance in examining whether your corporation’s tax bill can be reduced or if you have any questions regarding estimated tax payments, contact us. We’re here to help you navigate the intricacies of corporate tax planning and ensure your business remains compliant while minimizing tax liability.

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