Filing and Paying 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.

This section will help you determine when and how to report a corporation's income tax.

Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a tax year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income.

A corporation generally must file Form 1120 to report its income, gains, losses, deductions, credits, and to figure its income tax liability. 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.

Corporations can generally file Form 1120 and certain related forms, schedules, and attachments electronically. Certain corporations must electronically file Form 1120. However, these corporations can request a waiver. For more information regarding electronic filing, visit www.irs.gov/efile.

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.

A corporation's tax year ends December 31. It must file its income tax return by March 15th.

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.

File Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information and Other Returns, 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.

A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year. The two methods of depositing taxes are discussed below.

The corporation must use EFTPS in the current tax year to make deposits of all tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes) if:

• The corporation paid more than $200,000 in federal depository taxes in the second preceding tax year; or
• The corporation was required to make electronic deposits in the prior tax year.

 
For example, if the corporation made more than $200,000 in federal depository taxes in 2004, or the corporation was required to use EFTPS in 2005, it would be required to use EFTPS in 2006.

Once a corporation is required to use EFTPS it must continue to do so in all subsequent tax years. If the corporation is required to use EFTPS because of the $200,000 threshold it must continue to use EFTPS in later years even if subsequent deposits are less than the $200,000. If the corporation fails to use EFTPS, it may be subject to a 10% penalty.

If the corporation is not required to use EFTPS, it may voluntarily make deposits using EFTPS. However, if the corporation is voluntarily using EFTPS it will not be subject to the 10% penalty if it makes deposits using a paper coupon.

For more information on EFTPS and enrollment, visit www.eftps.gov or call 1-800-555-4477. Also see Publication 966, The Secure Way to Pay Your Federal Taxes.

If the corporation does not use EFTPS, it must deposit its income tax payments with an authorized financial institution using Form 8109, Federal Tax Deposit Coupon. For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Publication 583, Starting a Business and Keeping Records.

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. A corporation that has a reasonable cause to file late must attach a statement to its tax return explaining the reasonable cause.

A corporation that does not pay the tax when due may be penalized 1/2 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.

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.

Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663 of the Internal Revenue Code.

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.

Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.

Your corporation's tax year ends December 31. Installment payments are due on April 15, June 15, September 15, and December 15.

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.

Use Form 1120-W, Estimated Tax for Corporations, as a worksheet 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.

Each required installment is 25% of the income tax the corporation will show on its return for the current year.

Each required installment is 25% of the income tax shown on the corporation's return for the previous year.

To use Method 2:

1. The corporation must have filed a return for the previous year,
2. The return must have been for a full 12 months, and
3. 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.

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.

1. The annualized income installment method.
2. The adjusted seasonal installment method.

Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any 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.

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.

Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and to figure the amount of the penalty.

If the corporation is charged a penalty, the amount of the penalty depends on the following three factors.

1. The amount of the underpayment.
2. The period during which the underpayment was due and unpaid.
3. 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.

1. The annualized income installment method was used to figure any required installment.
2. The adjusted seasonal installment method was used to figure any required installment.
3. The corporation is a large corporation figuring its first required installment based on the prior year's tax.

If the corporation is required to use EFTPS to pay its taxes, it must also use EFTPS to make its estimated tax deposits. If the corporation does not use EFTPS it should make its estimated tax deposits with an authorized financial institution using Form 8109.

A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, 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.

If a domestic corporation acquires a U.S. real property interest from a foreign person or firm, the corporation may have to withhold tax on the amount it pays for the property. The amount paid includes cash, the fair market value of other property, and any assumed liability. If a domestic corporation distributes a U.S. real property interest to a foreign person or firm, it may have to withhold tax on the fair market value of the property. A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. For more information, see section 1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interest; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.