2021 CA Form 568 Company Tax Fee for Single Member LLC formed in 2021

[phoebecat]

I’m not an expert, but I also agree with Michael’s interpretation. If we interpret paragraph 2 to mean that SMLLCs and LLPs are excluded from the first year exemption, that would directly contradict the first paragraph. To me, it would only make sense for paragraph 2 to mean simply that LLCs, including those which are disregarded entities (SMLLCs) and LLPs, are usually subject to an annual tax. Also, look at the preceding paragraph as well: “Single member LLCs classified as disregarded entities generally do not report their own income separately from their owners. However, they are treated as separate entities for purposes of the annual tax, LLC fee, tax return requirements, and credit limitations.” This further supports that it doesn’t matter whether the LLC is a disregarded entity—they are all treated as separate entities for the purposes of the annual tax, and therefore they should all be exempt from the first year annual tax, separate entities or not. I realize there is likely to be further debate on this, but in the meantime, can we perhaps be given the option to override this, so that those of us who believe we are not subject to the tax can zero this out?

[RMod]

@GeorgeM777 , thank you for looking into this.  My reading agrees with Michazl and phoebecat, and would appreciate an option to zero out the line based on my reading of the rule as Phoebecat suggested.

[GeorgeM777]

We continue to maintain our position as previously stated.  However, if you wish to override the $800 franchise tax, you can do so using the TurboTax desktop version.  TurboTax desktop allows a taxpayer to view their tax forms and, in the case of the $800 franchise tax, override such amount by right clicking on the tax amount, selecting the Override option, and then changing the $800 franchise tax amount to 0.  You can view all your tax forms by clicking on Forms in the upper right corner of the application.  

Please bear in mind that when taxpayers change amounts on their forms, they negate the audit guarantee.  The audit guarantee remains in effect only when taxpayers prepare their returns in the Step-by-Step mode.  

TurboTax online does not have the same option as TurboTax desktop with regard to viewing forms and editing in forms mode.  Included below is a link to a TurboTax article explaining how a taxpayer can move from TurboTax online to TurboTax desktop. 

How to Switch Form TurboTax Online to TurboTax CD/Download

@Michazl

@phoebecat

@RMod

[RMod]

Thank you, this solves my problem (on Mac, click into the cell and select override from edit menu)

[Michazl]

@GeorgeM777 based on your reading, who *would* qualify for the exemption? The second paragraph seems to cancel out everything from the first paragraph. Audit protection is important to me, so I don’t want to lose that. I truly believe this is an error with the software. Is there any way to escalate this for additional review?

[GeorgeM777]

California Assembly Bill 85 specifically exempts limited partnerships from the annual franchise tax for its first taxable year.  AB 85 defines a limited partnership as follows:

"(d) For purposes of this section, “limited partnership” means any partnership formed by two or more persons under the laws of this state or any other jurisdiction and having one or more general partners and one or more limited partners."

Regarding the annual franchise tax and limited partnerships, AB 85 states the following:

"(f) (1) Every limited partnership doing business in this state as described in subdivision (a) that files a certificate of limited partnership or registers with the Secretary of the State pursuant to subdivision (b) on or after January 1, 2021, and before January 1, 2024, shall not be subject to the tax imposed under this section for its first taxable year."

A limited liability partnership would also be exempt from the annual franchise tax for its first taxable year.  In this regard, AB 85 states the following:

"(e) (1) Every limited liability partnership doing business in this state as described in subdivision (a) that registers with the Secretary of the State pursuant to subdivision (b) on or after January 1, 2021, and before January 1, 2024, shall not be subject to the tax imposed under this section for its first taxable year."

An SMLLC that elects to be taxed as an S Corp would also be exempt from paying the annual franchise tax for its first taxable year.  

Regarding further escalation of this matter, what we recommend at this point is that you contact the CA Franchise Board directly and request their opinion on whether SMLLCs are indeed exempt, in their first year, from the annual franchise tax.  Their number is 1-800-852-5711.

Here is a link to CA Legislative website which contains AB 85.

California Legislative Information

@Michazl

[DSA47]

@GeorgeM777 - How is what you cite in AB85 different than section 10 of AB85 which updates section 17941 of the Revenue and taxation code to include the following:

:(g) (1) Every limited liability company doing business in this state as described in subdivision (a) that organizes or registers with the Secretary of the State pursuant to subdivision (b) on or after January 1, 2021, and before January 1, 2024, shall not be subject to the tax imposed under this section for its first taxable year.

Nothing in this text indicates that there are exceptions to LLCs in their first year being exempt from the tax.  It specifically states that it applies to every LLC described in section (a), which does not exclude disregarded entities.

[Michazl]

@GeorgeM777 I spoke with CA FTB via the general questions chat. She said (regarding AB 85):
"it doesn't specify SMLLC, but this entity will fall under an LLC. SMLLC/LLC formed on or after 01/01/2021 are exempt to pay the 800.00 for the first tax year"

In reply, I asked: 

"The source of the issue with TurboTax was Form 568, Line 3 of Schedule IW.

TurboTax was auto-filling in '$800' to cover the annual LLC tax, despite AB 85. Am I correct in marking this as '$0'?"

Her reply: "yes you can put as $0, turbo tax might not be updated"

Is this something we can escalate and get resolved in the product. I want to make sure my audit protection is fully in place without needlessly paying an additional $800.

[benri]

I have the exact same issue. This issue affects everyone who formed an LLC in 2021, so it's definitely a big deal.

Michazl, thank you for calling CA FTB and clarifying this. I hope we receive an answer soon.

[apip]

I'm in the same boat--replying so I can find the answer when we get to it.

More thanks to @Michazl for actually following up with the CA FTB! hopefully TurboTax will fix their implementation.

[apip]

Hi @GeorgeM777 any more progress on this question as to whether TurboTax will be updating the interface to align with what CA FTB has recommended?

[pawan8um]

Hi, having the same issue. Formed LLC in 2021 and turbotax is defaulting to $800 fee. Can this be corrected ?

[Richard1185]

Seems like Intuit does a poor job of communicating intentions or following up on known issues.

Forces you into a more expensive product to correct their failure to respond.

[yeahyeah2]

same here - not sure what to do next. called TurboTax support but they were unable to help.

[benri]

I’ve decided to manually change the $800 to $0 and send the form via snail mail. Another option is to e-file via the free California website with the help of TurboTax’s auto populated form. 

@Michazl apparently stated that CA FTB recommended manually changing the $800 to $0.