In This Issue:
Courts Limit IRS Access to Tax Accrual Work Papers Legislation Tightens CPA Responsibility for Tax Returns
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Final Regulations Released for Corporate Estimated Taxes
By Katharina M. Herbig Final regulations have been issued on the proper method of computing a C corporation's estimated tax liability. The regulations will primarily affect corporations with more than $1 million in taxable income for any of the three preceding years. Author Kathy Herbig discusses the proper methods for determining taxable income and depreciation expense in an annualization period and available safe harbors. In August 2007, the Internal Revenue Service (IRS) released final regulations on corporate estimated taxes. The regulations provide several clarifications related to calculating estimated tax payments, particularly in the area of the annualized installment method. Among other things, the regulations address the calculation of taxable income, the identification and treatment of extraordinary items, and the ratable allocations of deductions throughout the year. The General Requirements Corporations with taxable income of more than $1 million for any of the three preceding years are not eligible for the safe harbor method and generally use the annualized income method. The final regulations state that if an amended prior year return is filed and a taxpayer is paying estimated tax payments under the safe harbor method, the tax liability on the amended return is used for estimated tax payments made after the amended return is filed. The discussion below assumes a corporation ineligible for the safe harbor method and using the annualized income installment method. Calculating Taxable Income The final regulations’ list of these deductions includes real property tax deductions, bonus compensation deductions (including the employer's share of employment taxes), deferred compensation deductions, and deductions under Treasury Regulation Section 1.263(a)-4(f), which is the 12-month rule. The final regulations also specify that corporate taxpayers must take extraordinary items into account after annualizing taxable income for the annualization period. Examples include a net operating loss carryover, an Internal Revenue Code Section 481(a) adjustment for a change in accounting method, or an item from the settlement of a tort or similar third-party liability. Other than a net operating loss carryover or a Section 481(a) adjustment, a corporate taxpayer may choose to treat a de minimis extraordinary item as an ordinary item of income or deduction in the annualization period in which it occurs. A de minimis extraordinary item is an item identified in the regulations or the Internal Revenue Bulletin and the transaction results in total extraordinary items of less than $1 million. The net operating loss carryover must be considered an extraordinary item on the first day of the tax year. The Section 481(a) adjustment is considered an extraordinary item on either the first day of the tax year or on the date the Form 3115, “Application for Change in Accounting Method,” is filed. In addition to extraordinary items, credits — both current and carryover — must be taken into account after income has been annualized and tax liability has been computed on the annualized income. Calculating Depreciation Expense Under the general rule, the taxpayer may take into account an estimate for annual depreciation and amortization. The anticipated annual depreciation expense is computed based on all relevant information available as of the last day of the annualization period. This includes: 1) depreciation expense related to additions and disposals; 2) projections for activities that are reasonably expected to occur during the taxable year; and 3) a proportionate amount of the annual depreciation expense for the current period. The resulting expense will usually be higher than that calculated under the depreciation safe harbors, which essentially base the expense on activity that has occurred only through the current period or on the taxpayer’s prior year depreciation expense. Under the first safe harbor, known as the proportionate depreciation allowance, depreciation for an annualization period is based on actual asset activity that has occurred through that period. The second safe harbor rule allocates a proportionate amount of 90 percent of the prior year depreciation and amortization expense to the current annualization period. Get Into Compliance The final regulations will be applied beginning with the first estimated payment the taxpayer computes using the annualized income installment method, which will generally be the 2008 second quarter payment. Corporations should review their estimated tax payment calculations to ensure that the calculations are updated to comply with the finalized regulations. Katharina M. Herbig is a manager specializing in taxation for financial institutions with Crowe Chizek and Company LLC in Louisville, Ky. She can be reached at 502.420.4501 or kherbig@crowechizek.com. Download PDF Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer. 
Archives Crowe Tax Notes (September 2009) |
