If you’re like a lot of people in business, you make estimated corporate tax payments to IRS based on the taxes you paid in the previous year. But if you’re having a really bad year, you may have no income tax liability at all. In such circumstances, it’s a bad economic decision to keep paying estimated income taxes.
Of course, it’s not always possible to predict your company’s annual income and tax liability at the beginning of the year. By the time you discover you’re in trouble, you may have already made several quarterly estimated tax payments–money your business may desperately need over the next few months.
For instance, a publishing house was blindsided by a series of misfortunes during one tax year. The company’s federal income tax liability for the previous year had been nearly $240,000, and the publisher had so far made two quarterly estimated tax payments of $60,000 each in the current year.
All of a sudden the roof fell in. The company’s primary printer went out of business and the publisher wound up paying considerably more for these services at a different shop. Then the economy turned sour and book sales fell off sharply. To make matters worse, a major retail chain abruptly canceled orders for a large number of the company’s titles. Next, several top authors jumped ship and signed on with a different publishing house. Finally, when it looked like things couldn’t get any worse, the courts ordered the firm to pay $100,000 in damages as a result of a libel suit!
It was a nightmare. The year was a total loss! No matter what happened over the next six months, there was no way the publisher was going to finish the year in the black.
The fact that the company wouldn’t have any tax liability for the year was small consolation. The publisher had already laid out $120,000 in estimated tax payments–money that the firm now needed desperately to remain solvent. Fortunately, businesses don’t have to wait until they file their annual tax return to recover overpayments in estimated income taxes.
By filing a Form 4466 you can secure a quick refund of overpaid estimated taxes. There are a few strings, however. The overpayment must be at least 10 percent of the expected tax liability and at least $500. Moreover, you must also submit a Form 1120 to “perfect” the claim.
Corporations that still owe taxes from the previous year can avoid having to make those payments if they anticipate a loss in the current year. Firms facing such unhappy circumstances should file a form 1138 and claim a net operating loss carryback.
The form 1138 extends the time of payment of the previous year’s tax liability because the expected net operating loss for the current year, when carried back, will either reduce or eliminate the previous year’s tax liability.
Believe me, the paperwork is worth the trouble. When you’re struggling to keep your business alive, there’s no excuse for offering the government an interest free loan!