Large Corporation, with over $1 million in taxable income for each of the last several years, paid estimated tax payments of $30,000 each quarter for the current year.The actual tax liability for the current year is $160,000; last year's tax liability was $145,000.Income is earned evenly throughout the year.What is the quarterly amount that may be subject to the underestimation penalty?

Question

Quizplus · Accepted Answer

To avoid an underestimation penalty, a taxpayer must pay the lesser of 90% of the current year's tax liability or 100% of the prior year's tax liability (110% if the prior year's taxable income exceeded $1 million). In this case, 90% of the current year's tax liability is $144,000 (90% x $160,000). Since the corporation made estimated payments totaling $120,000 ($30,000 x 4 quarters), the remaining amount subject to penalty is $40,000 ($160,000 - $120,000). Since the payments were made evenly throughout the year, each quarterly payment is considered to have been made on the last day of the quarter. Therefore, the amount subject to penalty for each quarter is $10,000 ($40,000 ÷ 4 quarters). Choice C is the correct answer.

Large Corporation, with Over $1 Million in Taxable Income for Each