In this video, we walk through 3 REG practice questions about calculating C corporation estimated tax payments and foreign income tax credits. These questions are from REG content area 5 on the AICPA CPA exam blueprints: Federal Taxation of Entities.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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C Corporation Estimated Tax Payments
- C Corporations are required to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
- Payments are usually made in four equal installments.
- The amount of each payment is typically based on the lesser of 100% of the tax shown on the corporation’s return for the previous year (if it was a 12-month return) or 100% of the estimated tax for the current year.
Example:
ABC Corp reported a tax liability of $300,000 for Year 1 and expects a liability of $400,000 for Year 2. ABC Corp should make quarterly estimated tax payments of $75,000 for Year 2 (100% of Year 1’s liability divided by four).
Definition and Rules for a “Large” Corporation
- A “large” corporation for estimated tax purposes is generally one that had taxable income of $1,000,000 or more in any of the three preceding tax years.
- For such corporations, the required estimated tax payment is usually based on the taxable income of the current year rather than the previous year’s tax.
- After the first quarter, large corporations cannot use the prior year’s tax as a guide; they must estimate and pay based on the current year’s actual income.
Example:
QRS Corp had taxable income exceeding $1,000,000 in the past three years. In Year 1, its tax liability was $1,400,000. For Year 2, the estimated tax is $1,600,000. QRS Corp must make quarterly estimated tax payments of $400,000 for Year 2 (100% of Year 2’s estimated tax divided by four) because it is considered a large corporation.
Foreign Tax Credit for C Corporations
- The foreign tax credit is a non-refundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholdings.
- The credit is intended to mitigate the double taxation of such income.
- The credit is the lesser of the amount of foreign income taxes paid or accrued or the U.S. tax liability on the foreign income.
Limitations:
- The credit cannot be more than the total U.S. tax liability multiplied by this ratio: the taxpayer’s total foreign source taxable income divided by the total U.S. taxable income.
- It cannot exceed the amount of U.S. tax attributable to the taxpayer’s foreign-sourced income.
Deduction vs. Credit:
- A corporation may choose to deduct foreign taxes from its income, which reduces its taxable income, or to claim a credit, which reduces its U.S. tax liability dollar for dollar.
- The choice between the deduction and the credit will depend on which option provides the greater benefit after accounting for the foreign tax credit limitation.
Example:
TechGlobal Corp has $900,000 in U.S. income and $100,000 in foreign income from Country Y and paid $10,000 in taxes to Country Y.
- If it chooses to deduct the foreign taxes, it would deduct the foreign income taxes from the total income of $1,000,000, leaving $990,000. Then it would multiply that by 21%, leaving a tax liability of $207,900.
- If it chooses the credit, it calculates its U.S. tax as $210,000 (total income of $1,000,000 at 21%). The limit on the foreign tax credit is $21,000 (10% of the U.S. tax liability, because $100,000 of the $1,000,000 was foreign). However, since it only paid $10,000 in Country Y, it can claim all of it as a credit. Its U.S. tax after the credit is $200,000 ($210,000 – $10,000), making this the better choice.
