What is Advance Tax? Why and when does the company need to pay?
Advance taxes, often referred to as estimated taxes in the context of US corporations, are payments made throughout the year based on an estimate of the corporation’s taxable income. Here are some key reasons and instances when US corporations need to pay advance or estimated taxes.
Quarterly Payments:
Corporations are typically required to pay estimated taxes quarterly if they expect to owe at least $500 in tax after subtracting any withholding and credits. These quarterly payments are due on specific dates throughout the year.
Avoiding Penalties:
Failure to pay estimated taxes or underpayment can result in penalties and interest charges imposed by the IRS. Paying estimated taxes helps corporations avoid these penalties.
Tax Liability:
If a corporation’s tax liability (the amount of tax they owe) is expected to be significant, paying in advance helps distribute the tax burden across the year rather than facing a large, lump-sum payment at tax filing time.
No Withholding:
Unlike individuals who may have taxes withheld from their paychecks, corporations don’t have this automatic withholding. Therefore, they are responsible for estimating their tax liability and making timely payments.
Tax Planning:
Paying estimated taxes allows corporations to better manage their cash flow and budget for their tax obligations. It also helps them align their financial planning with their tax responsibilities.
In summary, corporations need to pay advance or estimated taxes to comply with tax regulations, avoid penalties, manage their tax liability, and ensure they meet their financial obligations to the IRS throughout the year.
Always consult with a tax professional or accountant to understand the specific requirements and obligations your corporation might have concerning estimated tax payments.
