Paying and Filing Income Taxes
The federal income tax is a pay-as-you-go tax. A corporation generally must make estimated tax payments as it earns or receives income during its tax year. After the end of the year, the corporation must file an income tax return. This section will help you determine when and how to pay and file corporate income taxes.
Estimated Tax
Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. This section will explain how to avoid this penalty.
When to pay estimated tax. Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.
Example 1. Your corporation's tax year ends December 31. Installment payments are due on April 15, June 15, September 15, and December 15.
Example 2. Your corporation's tax year ends June 30. Installment payments are due on October 15, December 15, March 15, and June 15.
If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day.
How to figure each required installment. Use Form 1120-W to figure each required installment of estimated tax. You will generally use one of the following two methods to figure each required installment. You should use the method that yields the smallest installment payments.
Note: In these discussions, return generally refers to the corporation's original return. However, an amended return is considered the original return if it is filed by the due date (including extensions) of the original return.
Method 1. Each required installment is 25% of the income tax the corporation will show on its return for the current year.
Method 2. Each required installment is 25% of the income tax shown on the corporation's return for the previous year.
To use Method 2:
- The corporation must have filed a return for the previous year,
- The return must have been for a full 12 months, and
- The return must have shown a positive tax liability (not zero).
Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only.
A large corporation is one with at least $1 million of modified taxable income in any of the last 3 years. Modified taxable income is taxable income figured without net operating loss or capital loss carrybacks or carryovers.
Other methods. If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may be able to lower the amount of one or more required installments by using one or both of the following methods.
- The annualized income installment method.
- The adjusted seasonal installment method.
Use Schedule A of Form 1120-W to see if using one or both of these methods will lower the amount of any required installments.
Refiguring required installments. If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will be more or less than originally estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. An immediate catchup payment should be made to reduce any penalty resulting from the underpayment of any earlier installments.
Underpayment penalty. If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. The penalty is figured separately for each installment due date. The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. This is true even if the corporation is due a refund when its return is filed.
Form 2220. Use Form 2220 to determine if a corporation is subject to the penalty for underpayment of estimated tax and, if so, the amount of the penalty.
If the corporation is charged a penalty, the amount of the penalty depends on the following three factors.
- The amount of the underpayment.
- The period during which the underpayment was due and unpaid.
- The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin.
A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any penalty and bill the corporation. However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax return if any of the following apply.
- The annualized income installment method was used to figure any required installment.
- The adjusted seasonal installment method was used to figure any required installment.
- The corporation is a large corporation and Method 2 was used to figure its first required installment.
How to pay estimated tax. Unless you volunteer or are required to make electronic deposits, you should mail or deliver your payment with a completed Form 8109 to an authorized financial institution. For more information, see the instructions for Form 1120-W.
Electronic Federal Tax Payment System (EFTPS). You may have to deposit taxes using EFTPS. You must use EFTPS to make deposits of all depository tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes) you incur in 2003 if you deposited more than $200,000 in federal depository taxes in 2001 or you had to make electronic deposits in 2002. If you first meet the $200,000 threshold in 2002, you must begin depositing using EFTPS in 2004. Once you meet the $200,000 threshold, you must continue to make deposits using EFTPS in later years even if subsequent deposits are less than the $200,000 threshold.
If you must use EFTPS but fail to do so, you may be subject to a 10% penalty.
If you are not required to use EFTPS because you did not meet the $200,000 threshold, then you may voluntarily make your deposits using EFTPS. However, if you are using EFTPS voluntarily, you will not be subject to the 10% penalty if you make a deposit using a paper coupon.
For information about EFTPS, access the IRS web site on the Internet at www.eftps.gov, or see Publication 966, Now a Full Range of Electronic Choices to Pay ALL Your Federal Taxes.
To enroll in EFTPS, call one of the following phone numbers.
- 1-800-945-8400
- 1-800-555-4477
Or to enroll online visit www.eftps.gov.
Quick refund of overpayments. A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Use Form 4466 to apply for a quick refund of an overpayment of estimated tax. A corporation can apply for a quick refund if the overpayment is:
- At least 10% of its expected tax liability, and
- At least $500.
Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax.
File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income tax return. Do not file Form 4466 before the end of the corporation's tax year. An extension of time to file the corporation's income tax return will not extend the time for filing Form 4466. The IRS will act on the form within 45 days from the date you file it.
Income Tax Return
This section will help you determine when and how to report a corporation's income tax.
Who must file. Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a taxable year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income.
Which form to file. A corporation must generally file Form 1120 to report its income, gains, losses, deductions, credits, and to figure its income tax liability. However, a corporation may file Form 1120-A if its gross receipts, total income, and total assets are each under $500,000 and it meets certain other requirements. Also, certain organizations must file special returns. For more information, see the instructions for Forms 1120 and 1120-A.
When to file. Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.
Example 1. A corporation's tax year ends December 31. It must file its income tax return by March 15th.
Example 2. A corporation's tax year ends June 30. It must file its income tax return by September 15th.
If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
Extension of time to file. File Form 7004 to request a 6-month extension of time to file a corporation income tax return. The IRS will grant the extension if you complete the form properly, file it, and pay any tax due by the original due date for the return.
Form 7004 does not extend the time for paying the tax due on the return. Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. The interest is figured from the original due date of the return to the date of payment.
For more information, see the instructions for Form 7004.
Penalty for late filing of return. A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. If the corporation is charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the corporation can show the failure to file on time was due to a reasonable cause. Corporations that have a reasonable cause to file late must attach a statement explaining the reasonable cause.
Penalty for late payment of tax. A corporation that does not pay the tax when due may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the corporation can show that the failure to pay on time was due to a reasonable cause.
Trust fund recovery penalty. If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. The penalty is the full amount of the unpaid trust fund tax. This penalty may apply to you if these unpaid taxes cannot be immediately collected from the business.
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying these taxes, and who acted willfully in not doing so.
A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee. A responsible person also may include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds.
Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if the person knows the required actions are not taking place.
For more information on withholding and paying these taxes, see Publication 15, Circular E, Employer's Tax Guide.
Amended return. Use Form 1120X to correct any error in a Form 1120 or Form 1120-A.
Income and Deductions
Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. However, some of the following special provisions apply only to corporations.
Below-Market Loans
A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following:
- A loan in exchange for a note that requires payment of interest at the applicable federal rate, and
- An additional payment.
Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction.
See Below-Market Loans in chapter 5 of Publication 535 for more information.
Capital Losses
A corporation can deduct capital losses only up to the amount of its capital gains. In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Instead, it carries the loss to other tax years and deducts it from capital gains that occur in those years.
First, carry a net capital loss back 3 years. Deduct it from any total net capital gain that occurred in that year. If you do not deduct the full loss, carry it forward 1 year (2 years back) and then 1 more year (1 year back). If any loss remains, carry it over to future tax years, 1 year at a time, for up to 5 years. When you carry a net capital loss to another tax year, treat it as a short-term loss. It does not retain its original identity as long term or short term.
Example. In 2002, a calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. The corporation treats this $6,000 as a short-term loss when carried back or forward.
The corporation carries the $6,000 short-term loss back 3 years to 1999. In 1999, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. It subtracts the $6,000 short-term loss first from the net short-term gain. This results in a net capital gain for 1999 of $7,000. This consists of a net short-term capital gain of $2,000 ($8,000 - $6,000) and a net long-term capital gain of $5,000.
S corporation status. A corporation may not carry a capital loss from, or to, a year for which it is an S corporation.
Rules for carryover and carryback. When carrying a capital loss from one year to another, the following rules apply.
- When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. In other words, you can carry capital losses only to years that would otherwise have a total net capital gain.
- If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first.
- You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back.
Refunds. When you carry back a capital loss to an earlier tax year, refigure your tax for that year. If your corrected tax is less than the tax you originally owed, use either Form 1139 or Form 1120X to apply for a refund.
Form 1139. A corporation can get a refund faster by using Form 1139. It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than one year after the year it sustains the capital loss.
Form 1120X. If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. The corporation must file the Form 1120X within 3 years of the due date, including extensions, for filing the return for the year in which it sustains the capital loss.
Charitable Contributions
A corporation can claim a limited deduction for charitable contributions made in cash or other property. The contribution is deductible if made to, or for the use of, a qualified organization. For more information on qualified organizations, see Publication 526, Charitable Contributions.
You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual.
Publication 78. You can ask any organization whether it is a qualified organization and most will be able to tell you. Or you can check IRS Publication 78, Cumulative List of Organizations, which lists most qualified organizations. The publication is available on the Internet at www.irs.gov or your local library may have a copy. You can also call Tax Exempt/Government Entities Customer Service at 1-877- 829-5500 to find out if an organization is qualified.
Cash method corporation. A corporation using the cash method of accounting deducts contributions in the tax year paid.
Accrual method corporation. A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them within 2½ months after the close of that tax year. Make the choice by reporting the contribution on the corporation's return for the tax year. A copy of the resolution authorizing the contribution and a declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. An officer authorized to sign the return must sign the declaration under penalties of perjury.
Limit. A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Figure taxable income for this purpose without the following.
- The deduction for charitable contributions.
- The deduction for dividends received.
- Any net operating loss carryback to the tax year.
- Any capital loss carryback to the tax year.
Carryover of excess contributions. You can carry over, within certain limits, to each of the subsequent five years any charitable contributions made during the current year that exceed the 10% limit. You lose any excess not used within that period. For example, if a corporation has a carryover of excess contributions paid in 2001 and it does not use all the excess on its return for 2002, it can carry the rest over to 2003, 2004, 2005, and 2006. Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover.
More information. For more information on the charitable contribution deduction, see the instructions for Forms 1120 and 1120-A.
Corporate Preference Items
A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. These items are known as corporate preference items and they include the following.
- Gain on the disposition of section 1250 property. For more information, see Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544.
- Percentage depletion for iron ore and coal (including lignite). For more information, see Mines and Geothermal Deposits under Mineral Property in chapter 10 of Publication 535.
- Amortization of pollution control facilities. For more information, see Pollution Control Facilities in chapter 9 of Publication 535 and section 291(a)(5) of the Internal Revenue Code.
- Mineral exploration and development costs. For more information, see Exploration Costs and Development Costs in chapter 8 of Publication 535.
For more information on corporate preference items, see section 291 of the Internal Revenue Code.
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