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

[shog92]

I formed a Single Member LLC in California in 2021.   When I fill out form 568 in Turbotax,  the annual LLC tax line 3 is auto-filling with $800 and I cannot override it.      I believe the correct answer for first year LLC's established in 2021 is $0.   How to address this?

Exemption Reference:    FTB site:  https://www.ftb.ca.gov/forms/2021/2021-568-booklet.html

"Exemption from First Taxable Year Annual LLC Tax – 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."

[GeorgeM777]

The $800 franchise tax appears correct.  Prior to the passage of the new regulation you cite, CA LLCs paid an $800 fee within 2-3 months of being approved.  Then they paid that fee again April 15th every year.  In some situations, LLCs formed later in the year (October – December) ended up with back-to back payments of $1,600.  Now, LLCs will only pay the $800 franchise fee once per year.  Thus, because your LLC was formed in 2021, you do not owe the franchise tax for 2021 (which would have been due April 15, 2021).  Therefore, your first franchise tax payment is due April 15, 2022.  

@shog92

[shog92]

Thanks George.    Line 3 & 7 on form 568 seem to relate to the 2021 tax of $800.    In addition, the program populates form 3522 for a 2022 tax payment of $800 due on April 15.     I agree with you, the 2022 payment using form 3522 sounds correct, but not the 2021 payment appearing on lines 3 & 7 of the 568.   But again, cannot override the value.

[GeorgeM777]

As a follow-up to the last response, the following information was obtained from the CA Franchise Tax Board website and provides additional information regarding who is, and who is not, subject to the $800 franchise fee. 

"Because of the operative date specified in AB 85, the 15-day rule may impact whether an LLC, LP, or LLP is eligible for the exemption from the annual tax during its first taxable year. The 15-day rule is a set of provisions within the California law (R&TC Sections 17936, 17946, 17948.2, and 23114) that provide some relief to business entities (LPs, LLPs, LLCs, and corporations) from the general requirement to pay the annual/minimum tax.

A business entity is not subject to the $800 annual/minimum tax if the entity both:

• Did not conduct business in the state during the taxable year
• The taxable year was 15 days or less

For example, if an entity filing on a calendar year basis is formed on December 17 or after and does no business for the remainder of the year, then it may not have to file a tax return and pay the $800 annual/minimum tax for that short tax year.  Since an entity that meets the 15-day rule is not required to file a tax return, this time period is not considered the first tax year. The following tax year will be considered the first taxable year."

Here is a link to the webpage from which the above quoted material was obtained.  

All About CA Business

@shog92

[Michazl]

Hey George, I'm having the same question. In the link you included, if you go to the very bottom of the page it says:

"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."

This seems to broaden the 15 day/no business conducted clause to just be any start date in 2021 does not have to pay the 2021 LLC tax. But the tax worksheet doesn't let us zero out the $800 for 2021 in Form 568. I believe it's a bug that is not considering the updated legislation.

[RMod]

I agree with others and am having the same issue.  There should be a way to zero out line 3 if you formed the LLC in 2021 (or better yet, turbotax should recognize the CA LLC first year tax exemption rule and automatically apply it for you)

Same is reflected in the thread posted if you search "CALIFORNIA EXEMPTION LLC AB85"

[GeorgeM777]

We are researching this issue and will respond soon.  

@Michazl

@RMod

[shog92]

Thanks George  -  Look forward to learning what you find out.       One more related question.  I notice working on the 568 form is there is a section where we're asked to "check one box if applicable" if this is the LLC's 1) initial return; 2) final return; 3) amended return.       In the case of my LLC, 2021 is both the year of formation and closure - so it's my initial and final return.    Is it better to choose 1 or 2?

[GeorgeM777]

Perhaps your (2) option is the best option given the 2021 instructions for Form 568.  Those instructions provide that an LLC will not be assessed the annual tax if the LLC meets all of the following requirements:

1. The LLC files a timely Final Limited Liability Company Return of Income, for the preceding taxable year, including extension.
2. The LLC did not do business in California after the final taxable year.
3. The LLC files the appropriate documents for cancellation with the California SOS within 12 months of the timely filed Final Limited Liability Company Return of Income.

Given the requirement in number 1 above, it appears that if you inform the CA Franchise Board that Form 568 is the final return for your LLC, then you can disclose, at the appropriate time, that a timely final LLC return was filed in the preceding tax year.  

In connection with the annual franchise tax of $800, is your LLC a single member LLC?  If not, have you or will you elect S Corp status for your LLC?  Lastly, if your LLC is not a single member LLC, is it a partnership, or limited partnership?

@shog92

[GeorgeM777]

Following up on the issue under review, is your LLC a single member LLC?  If it is, will you be electing S Corp status for your LLC?  Lastly, is your LLC a partnership or a limited partnership?  

@Michazl

@RMod

[RMod]

is your LLC a single member LLC?   Yes

If it is, will you be electing S Corp status for your LLC?   No

Lastly, is your LLC a partnership or a limited partnership?  Not sure it applies given it's a single member LLC (all of the members -- of which there is only 1 -- have the same powers)

@GeorgeM777 

[shog92]

Thanks George - this is really helpful.    To answer your question, my LLC is/was a single member LLC.    

All the best.

[phoebecat]

I am having the same problem. I formed my California SMLLC in January 2021 and I want to zero out the $800 amount on line 3 of Form 568.

[GeorgeM777]

After further review we still believe that the annual franchise tax of $800 still applies to SMLLCs.  Assembly Bill 85 does provide a first-year exemption from the annual $800 franchise tax; however, AB 85 only allows the first-year waiver for limited partnerships, limited liability partnerships, and limited liability companies (but not SMLLCs as explained below).  

Our support for claiming that SMLLCs are not eligible for the first-year waiver of the $800 annual franchise tax is predicated on information obtained from the CA Franchise Board website, in the section entitled Limited Liability Company Filing Information.  That section provides the following regarding the annual franchise tax and the first-year waiver:

• "Assembly Bill 85 provides a first-year exemption from the $800.00 annual tax to limited partnerships, limited liability partnerships, and limited liability companies that organize or register with the California Secretary of State on or after January 1, 2021, and before January 1, 2024.

• LLCs classified as disregarded entities or as partnerships are subject to an $800 annual tax..."  (underline added)

On the same page as the above quoted information, the CA Franchise Board indicates that for CA tax purposes, SMLLCs are classified as disregarded entities. 

Because disregarded entities (i.e., SMLLCs) are not eligible for the first-year waiver of the annual tax, TurboTax includes such tax on the returns for SMLLCs.  

Below is the link to the above quoted information.

Limited Liability Company Filing Information 

@RMod

@shog92

@phoebecat

[Michazl]

Hey @GeorgeM777 , just for the sake of debate/playing devils advocate - would it also be reasonable to read those two paragraphs as separate statements? They’re both in the ‘Tax’ section of the article. So could it be that paragraph 1 lists the exception that applies for the first year (inclusive of SMLLC). And paragraph 2 is simply mentioning that every partnership and single member LLC is required to pay $800/year typically, even if it’s a disregarded entity. But it’s not negating paragraph 1. It’s just a separate statement in the tax section and happens to be below the paragraph discussing the first year exclusion. Paragraph 2 also mentions that partnerships are required to pay the tax, but that’d pretty directly go against paragraph 1, which is why I believe they’re intended to be separate statements and not connected.