California estimated LLC Fee

California requires an estimated LLC Fee to be paid for the upcoming year. There is a penalty if you do not pay a sufficient estimated LLC Fee. There appears to be no safe harbor based on last years actual LLC Fee - is this correct? There is a worksheet for calculating the estimated LLC Fee based on anticipated revenues, but will this provide you a safe harbor? It seems not.

Reply to
Pico Rico
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First off, I will assume you are asking because the LLC is a corporation and not a partnership or sole proprietorship.

At one time CA provided a safe harbor based on prior year income. I believe that the 2008 legislation repealed that part but only for large corporations. It still exists for other corporations. Here's the definition of a large corp:

For purposes of this section, "large corporation" means any corporation if that corporation (or any predecessor corporation) had taxable income (computed without regard to net operating loss deductions) of one million dollars ($1,000,000) or more for any taxable year during the testing period. (2) For purposes of this subdivision, "testing period" means the three taxable years immediately preceding the taxable year involved.

CA does allow you to re-estimate (is that a word) your annual taxes as many times as you want. So as long as you make up the difference in the next quarterly payment, you would not be subject to the penalty. If by the 4th payment, you do come up short, it certainly appears that under their Rev & Tax Code you would be subject to the penalty for not paying

100% or 100% of the prior year if less and you are not a large corp.
Reply to
Alan

I meant LLC Fee. Not income tax of any sort.

Reply to
Pico Rico

Do you mean taxed as a corporation as opposed to being taxed as a partnership or proprietorship? In either case it is still an LLC.

I don't see how that would make any difference - the gross receipts tax applies in any case.

Reply to
Stuart A. Bronstein

In CA, only an LLC taxed as a corporation has to file estimated taxes.

Reply to
Alan

really? I think all LLCs in California have to file estimated LLC fees.

Are we talking about the same thing? Not income tax.

Reply to
Pico Rico

In CA the only "LLC fee" is a $75 filing fee when one is originally set up. Technically corporations don't pay income tax, they pay franchise tax. CA has an $800 minimum franchise tax for corporations and LLC's. And LLC's taking in more than $250,000 are additionally subject to a gross receipts tax.

But that's all I'm aware of. What are you talking about?

Reply to
Stuart A. Bronstein

What you refer to (correctly in my opinion) as a "gross receipts tax" the state of California calls an "LLC fee".

THAT is what I am talking about.

Reply to
Pico Rico

messagenews:Xns9E766E8D0B665spamtraplexregiacom@130.133.4.11...

Pico Rico is talking about the LLC fee imposed by Cal. Rev. & Tax. Code §17942. The fee is imposed because, back in the early 1990s when California's LLC statute was enacted, a revenue loss for the state was calculated even after imposing the $800 minimum tax on LLCs. (To the extent that businesses are conducted by flowthrough entities, such as LLCs taxed as partnerships or disregarded entities, that would otherwise have been conducted by corporations, the state loses the double taxation of corporate income that is built into the US tax system.) The Legislature made up for that projected loss by imposing the LLC fee. The reason it was called a fee, and not a tax, is so that it could be deducted in calculating the LLC's income either taxed at the entity level (if taxed as a C or S corporation) or at the owner level (if taxed as a partnership, disregarded entity or S corp).

Originally the fee was calculated with reference to the LLC's unapportioned "total income." After the courts declared that calculation unconstitutional (violates the Commerce Clause because it is not internally consistent), the law was changed to calculate the fee with reference to the LLC's "total income" from California sources

-- essentially, the California sales factor numerator, with some adjustments.

Before 2009, the LLC fee was due on the original due date of the LLC's return -- i.e., on April 15 of the succeeding year for a calendar year LLC. As part of the budget agreement reached early in 2009, collection of the fee was accelerated to June 15 of the taxable year. Thus a calendar year LLC had to pay the fee twice in 2009: once by April 15 based on 2008 total income, and again by June 15 based on projected 2009 taxable income. That mechanism doubled the state's revenue arising from the LLC fee in FY 2008-09. Alas, once this kind of acceleration is enacted, it is unlikely that it will ever be reversed. Doing so would result in NO revenue from the fee in the fiscal year in which the reversal took place.

There is a 10% penalty for underpayment of the estimated fee; however, there is a "prior year tax" exception. No penalty will be imposed if the fee paid by June 15 for the current year is at least as much as the fee paid for the previous year. CRTC Sec. 17942(d)(2).

By the way, the fee does not apply to an LLC that elects to be taxed as a corporation. CRTC Sec. 17941(d).

Katie in San Diego

Reply to
Katie

Thanks, Katie! Fabulous information from you as always.

Reply to
Stuart A. Bronstein

was there really a projected loss? Wouldn't the obvious choice prior to the existence of LLCs be a Sub S? Is there double taxation in that instance?

That is the answer. Funny the State doesn't bother to include this info in their form/instructions!

Thanks!

Reply to
Pico Rico

On Jan 26, 8:48 pm, "Pico Rico" wrote: snip

Yes, there really was a projected loss. In 1993, when California's LLC statute was pending in the Legislature, the FTB calculated (by who knows what mathematical alchemy) that the use of LLCs as flowthrough entities rather than C corporations would cost the state $254 million over the 4-year period after enactment. The fee was originally calculated to plug that gap. For years beginning in 1999 and 2000 the FTB collected data and recalculated the fee to fill the recalculated gap. The gap was recalculated again and the fee fixed at its current levels in 2001.

A similar analysis was done in 1987 when California first conformed to the S corporation rules as part of its conformity to the Tax Reform Act of 1986,. That's why California imposes the 1.5% corporate level tax (originally 2.5%) on S corporations.

Funny, I found that statement in at least two places in the instructions in the 2010 Form 568 booklet.

Katie in San Diego

Reply to
Katie

So what's the history of the $800 minimum tax on corporations and LLC's, even C?

Reply to
removeps-groups

Oh dear. I admit I'm an old timer, but even I don't go back THAT far!

I believe the fixed-dollar minimum tax for corporations goes back to the original enactment of the franchise tax law in 1929. The franchise tax is imposed for the privilege of exercising the corporate franchise within California. So the minimum tax is a kind of toll charge for the privilege of doing business with limited liability. I'm not sure what the original amount was, but I know it was $100 before 1972. (We were still auditing $100-minimum years when I joined the FTB audit staff in 1975.) In 1972 it was increased to $200. In

1987 the law was amended again to set the amount at $300 for years beginning in 1987 and 1988, $600 for years beginning in 1989, and $800 for years beginning after December 31, 1988. That's where it stands today. Effective for years beginning after 1999, the $800 minimum tax does not apply for the first year of a corporation's existence or qualification to do business in California.

Over the years the $800 minimum has been expanded to apply to other limited liability entities, including limited partnerships, LLCs, and qualified Subchapter S subsidiaries. Unlike corporations, however, these entities are subject to the $800 minimum from year one.

Katie in San Diego

Reply to
Katie

One of my clients who moved to CA a few years ago had a SMLLC with really large gross receipts, but also large cost of sales. So the LLC fee was, I think, $6,000 a year. He's now operating as an S corporation, because his salary is a deduction for CA income tax purposes, so the S corporation has lower taxes than the SMLLC would have paid. Interestingly, he continues to incorporate new companies here in CO and then registering in CA as a foreign corporation. It's a lot faster for getting a business underway, and the annual fee in CO is only $10. No requirement to file in CO because there is no activity here.

Reply to
Tom Healy CPA

He might be getting a little break on the self-employment tax, too, at least for the time being.

I'm always amused by people who think a state with no income tax, but a tax measured by gross receipts, is some kind of tax haven (e.g., Washington with the B&O). Ohio replaced its net income/net worth franchise tax with a gross receipts tax, at least partially with the idea that it would create a more favorable business climate. But you pay a gross receipts tax whether you're making any money or not!

Of course the LLC fee is not a gross receipts tax, technically speaking; it's not measured by gross receipts, but goes in steps with reference to "total income." A fine distinction . It was designated as a "fee" rather than a "tax" so that LLC members could deduct it. Big deal: just meant they had to set it higher to meet the revenue goals.

Katie in San Diego

Reply to
Katie

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