California LLC Franchise Tax Waived in First Year

Legislative Update Gives Exemption to New California Limited Liability Companies

LLCs registered to do business in California must pay an annual franchise tax of $800 to the state’s Franchise Tax Board (FTB). However, to relieve some of the financial pressures amid the pandemic for newly formed businesses, California Governor Gavin Newsome signed legislation in 2020 to exempt startups from paying the LLC franchise tax during their first year in business.

This is welcome news for aspiring business owners in the Golden State!

The new rules established by the state’s 2020 Budget Act (AB 85) exempt any LLC that organizes, registers, or files with the California Secretary of State on or after January 1, 2021 and before January 1, 2024, from paying the $800 minimum tax in their first taxable year.

This exemption also applies to newly formed Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs). Previously, only corporations were exempt from paying the franchise tax in their first tax year.

California AB 85 and the 15-day Exemption

Before the new legislation, there was already a 15-day rule that exempted LLCs from paying the annual franchise tax in their first year IF they have a “short” first tax year. The criteria:

• The entity did not conduct business in the state during the taxable year.
• The entity’s taxable year was 15 days or less.

How that worked is if an LLC registered in California (on a calendar year basis)  on or after December 17 and did not conduct business until after December 31, it would not have to file a tax return and pay the minimum tax for that short tax year. The entity’s first tax year would be considered the following calendar year.

So, what happens with LLCs that formed in the last half of December 2020 and took advantage of the 15-day rule for the 2020 tax year? Well, it appears that they will need to pay the minimum annual tax in the tax year 2021.

In a December 2020 Tax News Update, the FTB shared, “However, AB 85 only provides an exemption from the annual tax for LLCs, LPs and LLPs that organize, register, or file with the Secretary of State on or after January 1, 2021, and before January 1, 2024. Therefore, entities taking advantage of the 15-day rule by registering on December 17, 2020, and on or before December 31, 2020, are not eligible for the first year tax exemption, regardless of whether the 15-day rule would apply for that short period. Only LLCs, LLPs, or LPs that organize, register, or file after January 1, 2021, are eligible for the first taxable year annual tax exemption.”

Annual $800 Minimum Franchise Tax After the First Tax Year

When an LLC that has formed or is doing business in California is in its second tax year, it must begin to pay the $800 annual minimum franchise tax each year until it formally dissolves.

Note that LLCs that have elected to be treated as corporations for tax purposes do not pay the $800 franchise tax. They instead pay a 6.65 percent alternative minimum tax (AMT).

Due Date and How to Pay

Businesses must pay the annual franchise tax payments by the 15th day of the fourth month of each taxable year.

LLC owners should use the LLC Tax Voucher form (FTB 3522), which can be submitted and paid online with a credit card, through the FTB’s Web Pay portal, or through electronic funds transfer from a bank account.

The FTB also accepts payments by mail sent to:

Franchise Tax Board
PO Box 942857
Sacramento CA 94257-0631

FTB 3522 is relatively straightforward. However, if you want to move that task off your plate so that you can concentrate on growing your business, ask CorpNet to assist in filing it (along with your other state-required filings) to ensure you stay in good standing with the state.

Other California LLC Annual Fees

LLCs that make more than $250,000 of California income must pay an additional LLC fee. Those fees vary by income range.

Current Fee Amounts*

• $900 – For estimated California income of $250,000 to $499,999
• $2,500 – For estimated California income of $500,000 to $999,999
• $6,000 – For estimated California income of $1,000,000 to $4,999,999
• $11,790 – For estimated California income of $5,000,000 or more

LLCs with estimated income in California in one of the above ranges must estimate the fee they will owe and make an estimated fee payment by the 15th day of the sixth month of the current tax year. The form to use is FTB 3536 (Estimated Fee for LLCs). CorpNet can assist you in preparing and filing that form, too.

California LLC Income Tax

Most LLCs in California also have to file Form 568 (Limited Liability Company Return of Income) each year. This form reports LLCs’ annual tax and LLC fee. It’s also used for reporting the income, losses, etc. of multi-member LLCs that elected classification as a partnership.

The California income tax schedules that must be submitted with Form 568 and tax rates depend on the LLC’s classification:

• Single-member LLC classified as a disregarded entity – Treated as the same tax entity as its owner with income passing through to the LLC owner’s tax return and subject to the tax rate for the individual.
• Multi-member LLC classified as a partnership – LLC members report their income, deductions, and credits from the business on their personal income tax returns.
• LLCs classified to be taxed as a corporation – Subject to the state’s corporate income tax rate.

Our Filing Experts to Help You Start an LLC in California

With the annual minimum franchise tax exemption, these next few years are an ideal time to start a business in California—and CorpNet is here to assist you! Our business filing experts have in-depth knowledge of and experience with California’s registration and tax filing requirements.

Sources and Resources:

https://www.ftb.ca.gov/file/business/types/limited-liability-company/index.html
https://www.ftb.ca.gov/forms/2021/2021-3522.pdf
https://www.ftb.ca.gov/forms/2021/2021-3536.pdf
ftb.ca.gov/file/business/doing-business-in-california.html
https://www.ftb.ca.gov/forms/misc/1123.html

*According to the ftb.ca.gov website on March 5, 2021