In 2019, Omni (a calendar-year corporation) reported a tax liability of $500,000. Due to anticipated reduced sales volume the following year, Omni only made four equal estimated tax payments during 2020 totaling $100,000 ($25,000 per quarter). During 2020, Omni reports the following actual results at the close of each quarter as follows:

                                    Quarter-End                                  Cumulative Taxable Income

                                           First                                         $ 100,000

                                         Second                                      $ 250,000

                                          Third                                        $ 400,000

                                         Fourth                                       $ 600,000

a) Using the annualized income method, show your calculation of Omni’s required estimated tax payment at the end of the third quarter.

b) Show how you know that Omni is subject to an underpayment penalty by not fully paying its estimated taxes as of the end of the third quarter. What is the amount of the underpayment on September 15?

Cookie, Inc. reported taxable income of $640,000 this year and paid federal income taxes of $134,400. Not included in the company’s computation of taxable income is tax-exempt income of $20,500, disallowed meals and entertainment expenses of $48,250, and disallowed expenses related to the tax-exempt income of $2,000. Cookie deducted depreciation of $115,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $63,000. Included in the calculation of taxable income was a dividends received deduction (DRD) in the amount of $50,000.

c) What is the correct amount of Cookie’s current E&P?

Answer rating: 100% (QA)

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