P1-1a Accounting Answers
Vernon
The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the instructions. Taxpayers should not consider the instructions as authoritative law.
For more information, get form FTB 3541, California Motion Picture and Television Production Credit, form FTB 3551, Sale of Credit Attributable to an Independent Film, go to ftb.ca.gov and search for motion picture, or go to the CFC website at film.ca.gov and search for soundstage filming tax credit.
A small business may elect to apply the same provisions above to taxable years beginning on or after January 1, 2018 and before January 1, 2019. Taxpayers make the election by providing the following information to the FTB:
Partnerships and LLCs are considered doing business in California if they have a general partner or member doing business on their behalf in California. Likewise, general partners and members are considered doing business in California if the partnership or LLC, respectively, is doing business in this state. For more information, see R&TC Section 23101 or go to ftb.ca.gov and search for doing business.
The FTB may request copies of California or federal returns that are subject to or related to a federal examination. Generally, the California statute of limitations is four years from the due date of the return or from the date filed, whichever is later. However, the statute is extended in situations in which an individual or a business entity is under examination by the IRS. For more information concerning the extended statute of limitations, due to a federal examination, see General Information J, Amended Return.
The FTB recommends keeping copies of returns and records that verify income, deductions, adjustments, or credits reported, for at least the minimum time required under the statute of limitations. However, some records should be kept much longer. For example, members should keep records substantiating their basis in an LLC and LLCs should keep records to figure the basis of its assets.
The Federal TCJA signed into law on December 22, 2017 made changes to the IRC. In general, California R&TC does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015, with modifications. The following is a non-exhaustive list of the TCJA changes:
If an LLC elects to be taxed as a corporation for federal tax purposes, the LLC must file Forms 100/100S/100-ES/100W, form FTB 3539, and/or form FTB 3586 and enter the FEIN, and California SOS file number, if applicable, in the space provided. The LLC will be subject to the applicable provisions of the Corporation Tax Law and should be considered a corporation for purpose of all instructions unless otherwise indicated.
A partnership (or other business entity) that converts to an LLC during the year must file two California returns. Even if the partners/members and the business operations remain the same, the partnership should file Form 565, (or the appropriate form) for the beginning of the year to the date of change. For the remainder of the year, the newly converted LLC must file Form 568. See General Information I, Accounting Periods, for further instructions.
If the LLC was involved in a reportable transaction, including a listed transaction, the LLC may have a disclosure requirement. Attach the federal Form 8886, Reportable Transaction Disclosure Statement, to the back of the California return along with any other supporting schedules. If this is the first time the reportable transaction is disclosed on the return, send a duplicate copy of the federal Form 8886 to the address below:
The FTB may impose penalties if the LLC fails to file federal Form 8886, federal Form 8918, Material Advisor Disclosure Statement, or any other required information. A material advisor is required to provide a reportable transaction number to all taxpayers and material advisors for whom the material advisor acts as a material advisor.
If the LLC had to repay an amount that was included in income in an earlier year, under a claim of right, the LLC may be able to deduct the amount repaid from its income for the year in which it was repaid. Or, if the amount the LLC repaid is more than $3,000, the LLC may be able to take a credit against its tax for the year in which it was repaid. For more information, see the Repayments section of federal Pub. 525, Taxable and Nontaxable Income.
For additional business tax information, go to taxes.ca.gov, sponsored by the Board of Equalization (BOE), California Department of Tax and Fee Administration (CDTFA), Employment Development Department (EDD), the FTB, and the IRS.
LLCs classified as partnerships for tax purposes generally will determine their California income, deductions, and credits under the Personal Income Tax Law. They will be subject to an annual tax as well as the LLC fee based on total California income. See General Information F, Limited Liability Company Tax and Fee, and Schedule IW instructions included in this booklet, for more information.
LLCs organized in California are vested with all the rights and powers enjoyed by a natural person in carrying out business affairs. However, California law does not allow the formation or registration of LLCs (foreign or domestic) in California to render any type of professional service for which a license, certification, or registration is required under the Business and Professions Code or the Chiropractic Act, with the exception of insurance agents and insurance brokers.
Nonregistered foreign LLCs that are members of an LLC doing business in California or general partners in a limited partnership doing business in California are considered doing business in California.
Regardless of where the trade or business of the LLC is primarily conducted, an LLC is considered to be doing business in California if any of its members, managers, or other agents are conducting business in California on behalf of the LLC.
LLCs classified as a general corporation file Form 100, California Corporation Franchise or Income Tax Return. LLCs classified as an S corporation file Form 100S, California S Corporation Franchise or Income Tax Return. For LLCs classified as disregarded entities, see General Information S, Check-the-Box Regulations.
SMLLCs disregarded for tax purposes will be granted an automatic six month extension, with the exception of an SMLLC owned by a partnership or an LLC that is classified as a partnership for California tax purposes, which will be granted an automatic seven month extension. For more information see R&TC Section 18567.
LLCs can make an annual tax, estimated fee, or extension payment using tax preparation software. Check with your software provider to determine if they support EFW for annual tax, estimated fee, or extension payments.
Also see General Information G, Penalties and Interest, for the additional amount that is now due. To assure proper application of the tax payment to the LLC account, do not send the $800 annual tax with Form 568.
For taxable years beginning on or after January 1, 2021 and before January 1, 2024, an LLC that organizes, registers, or files with the Secretary of State to do business in California is exempt from the annual LLC tax in its first taxable year.
The definition of limited liability company has been revised to exclude certain title holding companies that are tax exempt provided that they are treated as partnerships or disregarded entities for tax purposes. As such they are not liable for the annual LLC tax and fee.
LLCs are subject to an $800 annual tax if they are doing business in California or have articles of organization accepted, or a certificate of registration issued by the California SOS. The annual tax is prepaid for the privilege of doing business in California, and is due and payable on or before the 15th day of the 4th month after the beginning of the taxable year. The annual tax must be paid for each taxable year until the appropriate papers are filed. See General Information Q, Cancelling a Limited Liability Company, for more information.
In addition to the annual tax, every LLC must pay a fee if the total California annual income is equal to or greater than $250,000. For more information, see Schedule IW instructions included in this booklet.
If the laws of the state where the LLC is formed provide for the designation of series of interests (for example, a Delaware Series LLC) and: (1) the holders of the interests in each series are limited to the assets of that series upon redemption, liquidation, or termination, and may share in the income only of that series, and (2) under home state law, the payment of the expenses, charges, and liabilities of each series is limited to the assets of that series, then each series in a series LLC is considered a separate LLC and must file its own Form 568 and pay its own separate LLC annual tax and fee, if it is registered or doing business in California.
The amount of the penalty for each month, or part of a month (for a maximum of twelve months), that the failure continues, is $18 multiplied by the total number of members in the LLC during any part of the taxable year for which the return is due. Interest will be charged on the penalty from the date the notice of tax due is mailed until the date the return is filed.
The failure-to-pay penalty begins at 5 percent. Every month or fraction thereof the amount is not paid the penalty increases 0.5 percent. The penalty continues to increase for 40 months, thereby maximizing at 25 percent. See R&TC Section 19132 for more information.
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