Business Entities · Corporations in general

Estimated tax payments

Corporate estimated tax is a mechanical topic with two features worth committing to memory, because both differ from the individual rules that practitioners use far more often. The instalment dates are not the same — the fourth falls in December, closing the year rather than following it. And the safe harbour based on last year’s tax is withdrawn from corporations of any size, on a test that looks back three years and that a corporation can fail once and be caught by for three.

The rule

The addition to tax. on an underpayment of estimated tax by a corporation an amount is added to the chapter 1 tax, computed by applying the IRC § 6621 underpayment rate to the amount of the underpayment for the period of the underpayment (IRC § 6655(a))^TY2026

How it is measured. the underpayment is the excess of the required installment over the amount paid on or before its due date, and the period runs from that due date to the earlier of the 15th day of the 4th month after the close of the year or the date the portion is paid. Payments are credited against unpaid required installments in the order those installments were required to be paid (IRC § 6655(b))^TY2026

The instalments. four required installments for each taxable year, due 15 April, 15 June, 15 September and 15 December for a calendar-year corporation — the fourth falling in December rather than in the following January, which is where the corporate schedule departs from the individual one (IRC § 6655(c))^TY2026

How much each must be. 25 percent of the required annual payment per installment, the required annual payment being the lesser of 100 percent of the tax shown on the current year's return or 100 percent of the tax shown on the preceding year's return — the prior-year branch unavailable where that year was not 12 months or the corporation filed no return showing a liability (IRC § 6655(d)(1))^TY2026

What “tax” means here. tax for this purpose means the sum of the IRC § 11 or subchapter L tax, the § 55 tax, the § 59A base erosion tax and the § 887 tax, less the credits against tax provided by part IV of subchapter A (IRC § 6655(g)(1))^TY2026

Large corporations. $1,000,000 — a large corporation is one that, or whose predecessor, had taxable income of that amount or more for any of the 3 taxable years immediately preceding the taxable year in question, determined without regard to net operating loss or capital loss carryovers (IRC § 6655(g)(2))^TY2026

And what they lose. a large corporation may not use the prior-year branch at all, except that it may use last year's tax for the first installment with the shortfall recaptured in the second (IRC § 6655(d)(2))^TY2026

The alternative computations. where a corporation establishes that the annualised income installment or the adjusted seasonal installment is less than the amount otherwise required, the required installment is the lesser of those two figures — but any reduction is recaptured by increasing the next required installment, and later ones so far as the reduction has not been recaptured (IRC § 6655(e)(1))^TY2026

The de minimis rule. no addition to tax where the tax shown on the return for the year, or the tax if no return is filed, is less than $500 (IRC § 6655(f))^TY2026

Current figures

How it works in practice

The dates first, because they are the item most often carried over wrongly from individual practice. For a calendar-year corporation the four instalments fall on 15 April, 15 June, 15 September and 15 December. The individual schedule has its fourth payment in the following January; the corporate one closes inside the taxable year. A corporation on a fiscal year takes the same pattern by month — the fifteenth day of the fourth, sixth, ninth and twelfth months of its year.

Each instalment is a quarter of the required annual payment, and the required annual payment is the lesser of this year’s tax or last year’s (IRC § 6655(d)(1)). That “lesser of” is the safe harbour, and it is the reason a corporation with a volatile year can pay on last year’s figure and be safe from the addition to tax even if this year turns out much better.

The large corporation rule takes that away, and the test deserves care. A corporation is large if it — or any predecessor — had taxable income of a million dollars or more in any of the three taxable years immediately preceding the year in question, computed without regard to net operating loss or capital loss carryovers. So a single exceptional year taints the following three, and a corporation currently earning very little may still be a large corporation. Members of a controlled group are aggregated for the test.

What a large corporation loses is the prior-year branch, with one exception that is really a deferral. It may use last year’s tax to compute the first instalment, but any resulting reduction is recaptured by increasing the second. The net effect is that a large corporation must fund the current year’s tax by the second instalment, with the first available on the old basis. Practitioners who remember only that “large corporations cannot use the prior year” overstate the rule by a quarter.

The annualised income and adjusted seasonal instalment methods are the release valve for a corporation whose income is not earned evenly. Both let a corporation pay less early in the year and both carry a recapture: whatever the reduction, it is added to the next required instalment, and to later ones until the reduction has been recovered. So the methods shift the timing of the funding rather than reducing the total, and using them makes each subsequent instalment larger than the flat quarter.

Two definitional points affect the arithmetic. “Tax” for this purpose includes the corporate income tax, the corporate alternative minimum tax and the base erosion tax, less the credits allowed under part IV of subchapter A — so a corporation with a base erosion liability must fund it through instalments like anything else. And the addition to tax is computed at the underpayment rate, applied to the shortfall for the period, which makes it an interest charge in substance rather than a fixed penalty. There is no reasonable cause defence to it in the way there is for a failure to file.

The period of the underpayment ends at the fifteenth day of the fourth month after the close of the year — that is, the unextended return date — or when the shortfall is paid, whichever is earlier. Extending the return does not extend the running of the addition.

Scenarios

How this has changed

The structure of IRC § 6655 has been stable for decades. The instalment dates, the quarter-of-the-required- annual-payment default, the large corporation rule and its first-instalment exception are all as they have been since the modern version of the section was settled.

The definition of “tax” in IRC § 6655(g)(1) is where the movement has been, and it moves whenever a new corporate-level tax is enacted. It now reaches the corporate alternative minimum tax and the base erosion tax, and the annualisation rules in IRC § 6655(e)(2) were amended to require adjusted financial statement income to be annualised alongside taxable income. A corporation subject to the corporate alternative minimum tax therefore has to project a second income measure quarterly, which is a real compliance burden that older material on this section does not mention at all.

The million-dollar threshold in IRC § 6655(g)(2) is not indexed and has not moved. As with the accumulated earnings tax credit, that means the provision reaches steadily further in real terms without any amendment ever being made — a corporation that would once have been comfortably outside the large corporation definition may now cross it in an ordinary year.

Exam focus

Two questions recur. The first asks for the instalment dates, and the answer is the fifteenth day of the fourth, sixth, ninth and twelfth months. Any option ending in the following January is the individual schedule offered as a distractor.

The second gives three years of taxable income and asks whether the corporation may base its instalments on the prior year. Scan the three preceding years for a single figure at or above a million dollars; one is enough. If the corporation is large, remember that the first instalment may still use the prior year, with recapture in the second.

Where a question gives a small tax figure, check the de minimis rule before computing anything.

Check yourself

1. A calendar-year corporation’s third estimated tax instalment for 2026 is due on what date?

Answer: 15 September 2026. IRC § 6655(c)(2) sets the four required instalments at 15 April, 15 June, 15 September and 15 December for a calendar-year corporation. A fiscal-year corporation uses the fifteenth day of the fourth, sixth, ninth and twelfth months of its own year.

2. A corporation had taxable income of $1,050,000 in 2024, $300,000 in 2025 and expects $340,000 in 2026. May it base its 2026 instalments on its 2025 tax?

Answer: only the first. It is a large corporation under IRC § 6655(g)(2), because it had taxable income of $1,000,000 or more in a year during the three-year testing period. IRC § 6655(d)(2)(A) denies it the prior-year branch, but IRC § 6655(d)(2)(B) allows the first instalment to be computed on the prior year’s tax, with the reduction recaptured by increasing the second instalment.

3. A corporation uses the annualised income instalment method and pays $20,000 rather than the $90,000 flat instalment in April. What happens to the $70,000?

Answer: it is recaptured in June. IRC § 6655(e)(1)(B) provides that any reduction in a required instalment from using the annualised income or adjusted seasonal method is recaptured by increasing the next required instalment by the amount of the reduction, and later instalments to the extent it has not been recaptured. The June instalment becomes $160,000.

4. A corporation makes no estimated payments and its return for the year shows tax of $460. What is the addition to tax?

Answer: nil. IRC § 6655(f) provides that no addition is imposed where the tax shown on the return for the taxable year is less than $500. The de minimis rule is tested against the tax for the year, not against each instalment.

5. A corporation underpays its June instalment and pays the shortfall when it files its extended return in October of the following year. Until when does the addition run?

Answer: until the fifteenth day of the fourth month after the close of the taxable year. IRC § 6655(b)(2) ends the period of the underpayment at the earlier of that date or the date the portion is paid, and the extension of time to file does not extend it. The addition stops accruing at the unextended return date even though the money was not paid until later.