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Ed Johnson
Ed Johnson, Tax Preparer
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Does a Delaware LLC doing business in CA need to pay the $800/year

Customer Question

Does a Delaware LLC doing business in CA need to pay the $800/year Franchise tax in CA? If yes, what is the FTB link to pay these taxes? Does FTB send an invoice for this?
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear Eugene,

 

This depends on the nature of your business. You would be a foreign corporation operaing in CA.

 

use this booklet to determine your filing requirement. If you did business in California, most likely you would be subject to the frachise tax. Search the document using the word Foreign to arrive at all the elements pertaining to your situation.

 

http://www.ftb.ca.gov/FORMS/misc/1063.pdf

 

electronic pay options:

 

http://www.ftb.ca.gov/online/payment_choices.shtml

 

 

 

Customer: replied 5 years ago.

Hi Edward,

Thanks! Your answer provided some pointers, leading me to explore more at FTB as follows.

Another document at FTB site clarifies that LLC is a "disregarded entity" for tax purposes unless the LLC has elected to be taxed as a corporation at the federal level. So, as my Delaware LLC is being taxed as a sole proprietorship (profits fall through as personal income through Scedule C), the Franchise Tax would not be due. I have not filed any forms yet to elect treatment of the LLC as a S or C Corp. Plese refer link below and the quoted text:

http://www.ftb.ca.gov/law/Technical_Advice_Memorandums/2000/2000200658.pdf

"Limited Liability Company Taxation
----------------------------------------------
Neither California nor federal law classifies LLCs as corporations or as partnerships for
taxation purposes. However, federal "check-the-box" regulations, incorporated by
California for income and taxable years commencing on or after January 1, 1997, allow
an LLC to elect classification as a corporation, partnership, or sole proprietorship, for federal and California tax purposes unless the entity meets certain specifications
requiring classification as a corporation. (See Rev. & Tax. Code, § 23038; Cal. Code.
Regs., tit. 18, §§ 23038(b)-1 through (b)-3.) Classification of an LLC for California
franchise or income tax purposes depends on the LLC's federal classification as a
corporation, partnership, or "disregarded entity." The classification elected for federal tax
purposes is the same for California tax purposes. (See Rev. & Tax. Code, § 23038; Cal.
Code. Regs., tit. 18, §§ 23038(b)-1 through (b)-3.)
An LLC with a single owner may (1) elect to be classified as an association taxable as a
corporation, or (2) elect to disregard its status as an entity separate from its owner, treat
its activities as a sole proprietorship, branch, or division of the owner, and have its
activities included in the tax return filed by the owner. (See Cal. Code. Reg., tit. 18,
§ 23038(b)-2(a).)"

So, it seems no Franchise tax would be due for a foreign LLC (or any LLC) operating in CA unless it has elected to be treated as a S or C CORP (by filing IRS forms 2553 or 8832 respectively). Sounds correct ?

Thanks,

Eugene

Expert:  Ed Johnson replied 5 years ago.

Dear Eugene,

 

Thank you for getting back to me.

 

LOL, wow...The thing I love about this venue, is we all learn and grow. Both customers and experts end up becoming intellecutally richer from the experience.

 

I agree that logically, this should follow. Disregarded for tax purposes would logically follow that disregarded LLC's would not have to then pay corporate taxes.

 

BUT, what also is logical, is that the state is not going to let it be that easy. The state is strapped for cash right. Unfortunatly, the 800 dollars and the LLC fees live on, all be it they may call it something else. A rose, by anyother name is XXXXX XXXXX rose, right?

 

 

Section 17941 of the Revenue and Taxation Code is amended.

This act requires any LLC that is not taxable as a corporation for California tax purposes (rather than only LLCs classified as partnerships) to pay the $800 minimum tax.

 

 

Section 23038 of the Revenue and Taxation Code is amended.

This act directs the FTB to adopt comparable regulations to the federal check-the-box regulations. Generally, whatever classification is adopted for federal purposes also must be used for California purposes.

 

A single member LLC formed in another state, but doing business in California, is allowed to "check-the-box" and be disregarded for tax purposes. Thus, the owner of the single member LLC will report the income (loss) from the disregarded LLC on a Schedule C, a partnership return or a corporation return depending on the owner's filing requirement. However, the LLC is not disregarded for purposes of the LLC tax, LLC fee, LLC information return or tax credits.

Customer: replied 5 years ago.

Hi Edward,

Thanks for the info. That's a 1997 amendment. Not to drag this out, but it begs the question - is this the latest on the subject?

Secondly, if the foreign LLC is registerd with FTB to do business in CA, would FTB not send an invoice for the Franchise tax if it is due? Will close this question after your next reply.

Thanks!

Eugene


Expert:  Ed Johnson replied 5 years ago.

I assumed it was the latest since it was posted in the professionals side of the information on legislation and guidance.

 

http://www.ftb.ca.gov/professionals/index.shtml

 

A 2008 ruling regarding payment of LLC fees by a foreing corporation (LLC operating in CA from outside the state) shows that the fee is alive and well. The contention in this case law was not if the fee should be assessed, but rather on what basis: income derived from world wide sales or CA only sourced activities.

 

http://www.ftb.ca.gov/law/notices/2008/2008_2.pdf

 

Again this tax requirement is still valid in this 2008 reference:

 

http://law.onecle.com/california/taxation/18633.5.html

 

 

The FTB would not send an invoice. BUT you bring up a good point. If you do not pay it, you will get a notice from them. You are expected to remit it without an invoice.

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 2 other Tax Specialists are ready to help you
Customer: replied 5 years ago.

Edward - Thank you !!

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Ed Johnson
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GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee