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REG CPA Practice Questions: Calculating C Corporation Estimated Tax Payments
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May 3, 2024
In this video, we walk through 3 REG CPA exam practice questions teaching how to calculate estimated tax payments and the foreign tax credit for C Corporations. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-calculating-c-corporation-estimated-tax-payments/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:55 Question 1: Estimated Tax Payments for C Corporations 03:23 Question 2: Large Corporations 06:00 Question 3: Foreign Tax Credit for C Corporations 09:10 Pillar Topics
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Welcome to another Reg Walkthrough video
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I'm Logan and in today's video, we're going to be going over C-Corp estimated tax payments
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and we'll also be going over how the foreign tax credit works for C-Corporations
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And we're going to be doing that the Superfast CPA way, which is diving straight into questions
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to learn the material. If you don't know much about our strategies and if you want to learn more, make sure you
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go to superfastcpa.com and check out our free one-hour webinar training. We go over the key ingredients to passing the CPA exam
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And again, it's one hour, it's free, and it will save you so much time in struggling
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with your process. Make sure you go check it out. The link will be in the description
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Also, if you like the idea of going through questions as your main learning material
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be sure to check out our Superfast CPA app where we not only have audio notes and review
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notes, but we also have five question mini quizzes that you can easily access on your
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phone throughout the day to continually be practicing. With all that said, let's dive straight into the few questions that we have for this video
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All right, here is question one. XYZ Corporation, a C corporation, operating on a calendar year, reported a tax liability
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of $200,000 for the previous year in year one. For the current year, year two, XYZ Corporation estimates its tax liability to be $250,000
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XYZ Corporation is determining its required quarterly estimated tax payments to avoid
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any underpayment penalties. Assume no significant changes in tax laws between year one and year two
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What is the minimum amount XYZ Corporation must pay in each quarterly estimated tax payment
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for year two to avoid underpayment penalties? So if you know anything about estimated tax payments for individuals, you might think
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about that in this situation. This is a little bit different for C corporations though
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So let's go ahead and dive into the answer to learn how this works. Okay, so the minimum that they would have to pay each quarter is $50,000
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Let's learn about that. According to the federal tax laws governing corporations, XYZ Corporation must make quarterly
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estimated tax payments to avoid underpayment penalties. To do this, XYZ Corporation must pay the lesser of 100% of the tax shown on the previous year's
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return or 100% of the estimated tax for the current year, divided into four equal installments
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Since XYZ Corporation's tax liability for year one was $200,000 and the estimated liability
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for year two is $250,000, XYZ must pay at least $50,000 each quarter, which is 100
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of the previous year's tax liability of $200,000, divided by four quarters to avoid underpayment penalties
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And one more thing here, if the corporation's income is uneven, such as they have a lot
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of income in one time of the year and very little income in another time of the year
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it may benefit from using the annualized income installment method, which allows the corporation
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to annualize its taxable income for each period and make payments that correspond to the income
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of each period. However, this probably isn't something you'll need to know too much about for the CPA exam
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but I did want to throw it out there that that is a possibility for C-corporations who
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have a lot of income in one time of the year and then not so much in another time, they
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can annualize it so that they pay a lot during that time of the year and maybe less at another
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time of the year. However, in most situations, we're going to be focusing on this, taking the lesser of
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either 100% of the previous year's tax liability or 100% of the current year's tax liability
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And all of this is to avoid underpayments. So we learned about that
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Let's go ahead and go to the next question. Okay, here's question two
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QRS Corporation is a C-corporation with taxable income exceeding $1 million for the past three years
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In year one, QRS Corporation's tax liability was $1,400,000. For year two, QRS Corporation estimates its tax liability will be $1,600,000
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What amount of quarterly estimated tax payments must QRS Corporation make in year two to avoid
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underpayment penalties? Okay, so we did just learn about this, you know, the lesser of 100% of the tax liability
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for the previous year or 100% of the current year tax liability
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However, there is a rule that we're going to look at in this. So if you want, take a second, pause the video, see if you can get the right answer
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But if not, let's go ahead and go straight into the answer to learn about the one exception
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to this rule. And here is the exception. So the answer would be $400,000
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You're like, what? That doesn't make sense. We just learned that it's either the lesser of the two, but let's learn a little bit more
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about it. A large corporation for the purposes of US federal income tax payments is generally defined
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as a corporation with taxable income of $1 million or more in any of the three preceding
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tax years. So if you have $1 million of income in any of your preceding tax years, then you are
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considered a large corporation. And that's who this rule applies to is large corporations
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For a large corporation, the estimated tax payments must be based on the estimated tax
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for the current year. Since QRS Corporation estimates a tax liability of $1,600,000 for year two, it must make quarterly
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estimated tax payments of $400,000 each. And that would be the $1,600,000 divided by four
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And all the rest are incorrect because, you know, this one is basing it off of the previous
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year's tax liability, which again, because they're a large corporation, you can't
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C is incorrect because that's kind of applying that niche rule that we talked about in the
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first question where they can annualize their income, which again, not really something
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you'll apply hardly at all in the CPA exam. So that's also not true
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And then they can't pick between the two because again, a large corporation has to do 100
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of the tax liability in the current year. So this is one of those situations where instead of the lesser of it has to be in the current
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year if you're considered a large corporation. Okay. With those two questions, we've learned basically what you need to know for estimated tax payments
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for C corporations. We're going to do one more question in this video going over the foreign tax credit
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We've gone over this in a previous video, if you remember, but we're going to talk about
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it specifically in the context of C corporations where it is a little bit different
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So we're going to do that question. Let's go ahead and go to it. Okay. Here is question three
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Global Tech Inc, a US corporation earned $800,000 of taxable income from its US operations and
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$200,000 of taxable income from its operations in country X during year one
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Global Tech paid $50,000 on income taxes to country X. The US tax rate for corporate income is 21%, which by the way, that is the real number
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You know, in a lot of these videos, we don't use the actual rates or the actual numbers
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because they change so much, but this 21% has been around for a while
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It could change in the future, but this is the current number in 2024
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To mitigate the double taxation, Global Tech must decide whether to take a deduction or
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a credit for the foreign income taxes paid. Calculate the possible credit and deduction
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Based on that calculation, take the better of the two options. What would the US tax liability be after taking the credit or deduction
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So with C corporations, there is the foreign tax credit, but they also can take it as a
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deduction instead of a credit. So you have to figure out what the deduction would be and what the credit would be, and
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you would most likely choose which would give you the lowest tax liability
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So let's go ahead and look at the answer to understand how you do this calculation. Okay
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And the answer is $168,000. So this is the lowest tax liability available when we're trying to calculate this
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So let's do the calculations. First you have to calculate the tax liability if they took the deduction
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So the deduction is you just take the foreign tax and you deduct it from your taxable income
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And then after you've deducted it, you calculate your taxable income. So you take away the $50,000 of foreign taxes paid, and then you calculate the tax and that
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gives you a tax liability of $199,500. And then for the credit, if you remember right, again, we learned how to do this for an individual
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It's pretty much the same. First you calculate the total taxable income, including the foreign income
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So take all the income, calculate the tax. So it would be $210,000
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Then you have to take the amount of foreign income as a percentage of the total income
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which was $200,000 of the $1 million. So that gives you 20% and you multiply that by the total tax liability
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And that gives you the limit to how much foreign income tax you can take as a credit
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So this is the limit. And since the actual foreign tax paid of $50,000 is more than that limit, they can only take
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up to that limit. So this is the credit. And the way that credits work is they reduce your tax liability, not your tax income
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So you take this credit away from the tax liability that was already calculated up here
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And that gives you a reduced tax liability of $168,000. Now obviously this is significantly better than this
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And in a lot of cases, it probably will be, but there is that option for C-corporations
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where they can take the deduction or they can take the credit. Maybe for simplicity, they would take the deduction or other things
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But for C-corporations, when it comes to the foreign income tax credit, you can take either
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the credit or you can take a deduction for the foreign income taxes paid
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And that's all we're going to go over in this video. Let's do one final part of the Superfast CPA strategy, which is something called pillar topics
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Now the idea behind pillar topics is as you're going through the questions to learn the material
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and after you've done your questions for the day, you take a second and you think about
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the things that you learned from those questions. You think about the topics and the concepts that kept coming up throughout the questions
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that seemed like the most important things because you saw them multiple times throughout
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the questions. They were obviously something you needed to know according to your review course
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So let's go ahead and look at the pillar topics for this video. All right, here are the pillar topics for the video
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So first of all, for C-corporations to avoid underpayment penalties, they must make estimated
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tax payments based on the lesser of either the 100% of the previous year's tax liability
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or 100% of the current year tax liability. However, if the C-corporation is considered a large corporation, then they have to pay
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100% of the current year tax liability. They don't get a choice between the previous year or the current year
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And also C-corporations can choose to take foreign income taxes paid and use them as
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either a deduction or use them in the foreign income tax credit
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And you would just need to calculate which of the two would lower your tax liability more
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And that's it for this video. I just wanted to go over those two simple topics to finish up
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I just want to remind everyone of the free one hour webinar training that we have at superfastcpa.com
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Make sure you go check that out. Also, if you liked going through questions as your main learning material, be sure to
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check out our Superfast CPA app where we have five question mini quizzes that you can use
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all throughout your day to continue improving and practicing. If you liked this video, make sure to like it and leave a comment
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I hope this was helpful and I will see you in the next video
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