Question

AC corporation had a federal income tax liability of $40,000 for each of the last five years, each covering a 12-month period. The tax for the current year is $48,000. What is the lowest amount that must have been paid as estimated taxes for the current year so that no penalty for underpayment is applicable?

Answer 1

$40,000

Step-by-step explanation:

In order to evade the penalty for underpayment as per the section 6655 of IRC, the 100% of the tax liability i.e. current or the predicted taxes should be equal to the lower of 100% of its tax liability in the previous years that must be paid by the corporation.

Here in the given situation, the liability of the present year is $48,000 i.e. more than the liability arise in the last year i.e. $40,000 so the lowest amount would be considered i.e. $40,000