Form 2220 Instructions for Underpayment of Estimated Tax

Form 2220, “Underpayment of Estimated Tax by Corporations,” is used to determine if a corporation has paid enough estimated tax and to calculate any penalty for insufficient or late payments. It applies to C corporations and S corporations with certain tax liabilities, such as those from built-in gains or excess net passive income. Tax-exempt organizations with unrelated business income and private foundations may also need to use this form.

Determining if Form 2220 is Required

A corporation should consider Form 2220 if its total tax for the year is $500 or more. Since the IRS often calculates the penalty and sends a notice, filing the form is not always mandatory. However, a corporation must file Form 2220 with its tax return, even if no penalty is due, in certain situations. These include using the annualized income installment method or the adjusted seasonal installment method.

Filing is also required if the entity is a “large corporation” calculating its first installment based on the prior year’s tax. A large corporation is one with a taxable income of $1 million or more in any of the three preceding tax years. Using these specific calculation methods can reduce or eliminate a penalty, making it advantageous to file the form to show how a lower payment was justified.

A penalty can be avoided if the total tax paid meets certain safe harbor thresholds. If payments meet these requirements, a penalty is not owed, and the form is not required unless one of the specific filing conditions applies.

Information and Calculations for Required Annual Payment

Part I of Form 2220 establishes the required annual payment. The calculation starts with the corporation’s total tax liability for the current year, taken from its main tax return, such as Form 1120. This figure includes regular income tax, alternative minimum tax, and other taxes.

Next, certain tax credits are subtracted from the total tax to determine the net tax used for the underpayment calculation. These credits can include the credit for federal tax paid on fuels and other specific business credits. The result is the total tax against which estimated payments are measured.

The “Required Annual Payment” is the smaller of 100% of the current year’s total tax or 100% of the prior year’s total tax. However, large corporations cannot use the prior year tax exception, except for the first quarterly payment. This figure from Part I becomes the baseline for determining the required quarterly installments.

Calculating Required Installments and Underpayment

Part III of the form calculates the amount due for each of the four installment periods. Using the Regular Method, the required annual payment is divided evenly by four to determine the minimum payment for each quarter. For a calendar-year corporation, these due dates are April 15, June 15, September 15, and December 15.

For all other fiscal years, payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the corporation’s tax year.

For corporations with uneven income, Schedule A of Form 2220 offers alternative calculation methods. The Annualized Income Installment Method is for businesses that earn more income later in the year. This method calculates the required payment for each quarter based on actual taxable income earned to date, which can result in smaller required payments for earlier quarters.

Another option is the Adjusted Seasonal Installment Method, designed for businesses with predictable seasonal income. To qualify, the corporation must have a history of earning a high percentage of its income in the same six-month period for the past three years. This method allows payments to align with seasonal cash flow, lowering required installments in slower periods.

After determining the required installment, the corporation compares this amount to the actual payments made for that period. If payments made by the due date are less than the required installment, an underpayment exists for that quarter. This underpayment amount is then used to compute the penalty.

Computing the Underpayment Penalty

Part IV of Form 2220 is used to calculate the penalty. This section applies a specific interest rate to the underpayment amount for each installment period. The penalty is an interest charge on the tax that was paid late, calculated for each quarter that was underpaid.

The penalty applies an interest rate to the underpaid amount for the number of days it was late. The IRS sets these rates, which can change quarterly; for example, the rate for the second quarter of 2025 is 7%. A higher rate of 9% applies to “large corporate underpayments,” which are tax underpayments exceeding $100,000.

The penalty for each quarter accrues from the installment’s due date until the underpayment is paid. The total penalty for the year is the sum of the amounts from all four quarters. This final figure is entered on the corporation’s main income tax return.

Penalty Waivers and Form Submission

A corporation may request a penalty waiver in unusual circumstances, such as a casualty or disaster that prevented required payments. To request a waiver, the corporation must complete Form 2220. A statement must be attached explaining the reasons for the underpayment.

When Form 2220 is completed, it must be attached to the corporation’s income tax return when filed. Any calculated penalty from Form 2220 is reported on the estimated tax penalty line of the main return.

Regarding the Corporate Alternative Minimum Tax (CAMT), the IRS is providing penalty relief for the 2024 tax year. Affected corporations must file Form 2220 to claim this relief and can exclude the CAMT liability when figuring their required annual payment. Attaching the completed form is necessary to avoid a penalty notice.