3 ways to pay
IRS changes rules for estimated taxes
The laws surrounding corporate estimated taxes have changed a number of times in the last 20 years, but the IRS has been slow to amend its rules to reflect those changes. As of August 2007, however, the IRS is up to date — and that means you need to be as well.
Final regulations issued last August, which apply to tax years beginning after Sept. 6, 2007, include many changes. Even though you still must make quarterly payments of at least 25% of your required annual payment, you may now determine that payment in one of three ways.
1. Payments based on previous year
This method is perhaps the easiest way to calculate your estimated tax payments, because you base them on the amount you paid last year. You need not recalculate last year’s tax using this year’s tax rate — even if the tax rates are different.
If you filed an amended return, though, you must take that into account when you’re calculating your required annual estimated payment. Keep in mind that the amended tax affects only the estimated payments you make after you filed the amended return.
2. Annualized income installment
The IRS regulations mean more changes for manufacturers who annualize income for estimated tax purposes. For one thing, you can’t determine taxable income for an annualization period as though it were a short taxable year. There are specific rules on how to account for income and deduction items during an annualization period.
Net operating loss deductions are considered extraordinary for purposes of annualization. They’re treated as occurring on the first day of the taxable year and are taken into account after annualization.
In determining an estimated annual depreciation expense, you may take into account any purchases, sales, changes in use or similar events that you expect to occur during the taxable year — as long as your expectations are reasonable based on information available on the last day of the annualization period.
Similarly, you can make a reasonable estimate of your manufacturers’ deduction to determine how much to consider when you’re calculating your annualized taxable income.
3. Adjusted seasonal installment
Manufacturers who realize 70% of their income during the same six-month period each year may use the adjusted seasonal installment method to determine their estimated taxes. The IRS final regulations make it clear, however, that, if you use this method, you must take into account the amount of alternative minimum tax that would apply for the computation period.
Abide by the rules
These and all the other rules in the final regulations have been years in the making, but you don’t have years to comply with them. If you haven’t already begun to review your current method of calculating estimated tax payments to see how it measures up to the new rules, you should do so as soon as possible.
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The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.