Penalties

Question 1

How do corporations avoid an underpayment penalty?

Answer 1

In order to avoid an underpayment penalty, corporations (other than large corporations) must generally pay estimated tax in the amount of the lower of 100 percent of the tax shown on the return for the current year or 100 percent of the tax shown on the return for the preceding year. In this case, however, Hirsch did not have taxable income in the prior year. Therefore, it cannot use the 100 percent of the preceding year method to avoid an underpayment penalty for the current year. It must pay 100 percent of the tax shown on its current return via estimated taxes to avoid an underpayment penalty.

Question 2

How do individuals avoid an underpayment penalty?

Answer 2

Individuals may avoid an underpayment penalty by making estimated payments of the lower of 100 percent of the tax from the preceding year or 90 percent of the tax shown for the current year to avoid an underpayment penalty.