IRS Publication 542 — Corporations

can show the failure to file on time was due to a reasonable cause. Note. 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.

Late payment of tax. A corporation that does not pay the tax when due may be penalized half 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 federal income, social security, or Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the U.S. 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 may also 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 or recklessly disregards obvious and known risks to the government’s right to receive trust fund taxes.

For more information on withholding and paying these taxes, see Pub. 15 (Circular E), Employer's Tax Guide. Other penalties. 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. 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. The Estimated Tax Worksheet, later, can be used to figure each required installment. Form 1120 -W, Estimated Tax for Corporations, is now historical. Prior versions are available on IRS.gov You generally use one of the following two methods to figure each required installment. You should use the method that yields the smallest installment payments. 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. T o 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. Large corporations. A large corporation is a corporation that had, or whose predecessor had, taxable income of $1 million or more for any of the 3 tax years immediately preceding the current tax year, or if less, the number of years the corporation has been in existence. For this purpose, taxable income is modified to exclude net operating loss and capital loss carrybacks or carryovers. Annualized income installment method and/or adjusted seasonal installment method. If the corporation's income is expected to vary during the year because, for example, it operates its business on a seasonal basis, it may be able to lower the amount of one or more required installments by using the annualized income installment method and/or the adjusted seasonal installment method. For example, a ski shop, which receives most of its income during the winter months, may be able to benefit from using one or both of these methods in figuring one or more of its required installments. See sections 6655(e)(2) and 6655(e)(3) of the Internal Revenue Code. 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 6 Publication 542 (1-2024)