Senate Bill 1234 (Alpert), as enacted on October 3, 1997, made the following changes to California law:
SUBJECT: Conformity/Check The Box Regulations/Corporation & Limited Liability Company
Section 17009 of the Revenue and Taxation Code is amended.
This act replaces "business trusts" or "Massachusetts trusts" with "business trusts or other business entities taxable as a corporation under regulations prescribed by the FTB" in the definition of "corporation." Thus, allowing such entities to be classified as "eligible entities" taxable as partnerships or corporations.
Sections 17039 and 23036 of the Revenue and Taxation Code are amended.
This act limits any tax credits from a disregarded LLC reported on the owner’s return. The credits are limited to the excess of the owner’s tax liability determined by including income attributable to the disregarded LLC over the owner’s tax liability determined by excluding the income attributable to the disregarded LLC. No credit is allowed if the owner’s tax liability determined by including the income attributable to the disregarded LLC is less than the owner’s tax liability determined by excluding the income attributable to the disregarded LLC. In addition, Section 23036, incorporates a reference number change (23622.5 to 23622.7) made by SB 965 (Stats. 1997, Ch. 603) to prevent this act from chaptering out SB 965.
Section 17941 of the Revenue and Taxation Code is amended.
This act requires any LLC that is not taxable as a corporation for California tax purposes (rather than only LLCs classified as partnerships) to pay the $800 minimum tax.
Section 18633.5 of the Revenue and Taxation Code is amended.
This act requires a disregarded LLC to file an information return within three months and 15 days following the close of the owner’s taxable or income year. Among other things, the information return must include information necessary to verify the LLC’s liability, provides the sole owner’s name and taxpayer identification number and consent of the owner to California tax jurisdiction. If the owner’s consent is not included, the LLC must pay income tax on behalf of its owner at the highest marginal tax rate.
This act also includes the change made by SB 1106 (Stats. 1997, Ch. 604) to provide that the department may prescribe the extent to which information must be included with the return (in the same manner as Section 18633) for consistency between requirements for like taxpayers. This provision applies to returns filed on or after January 1, 1998. This change was made to prevent this act from chaptering out SB 1106.
Section 23038 of the Revenue and Taxation Code is amended.
This act directs the FTB to adopt comparable regulations to the federal check-the-box regulations. Generally, whatever classification is adopted for federal purposes also must be used for California purposes.
A single member LLC formed in another state, but doing business in California, is allowed to "check-the-box" and be disregarded for tax purposes. Thus, the owner of the single member LLC will report the income (loss) from the disregarded LLC on a Schedule C, a partnership return or a corporation return depending on the owner’s filing requirement. However, the LLC is not disregarded for purposes of the LLC tax, LLC fee, LLC information return or tax credits.
"Grandfather" rules are provided for business entities that were properly classified as associations taxable as corporations for California tax purposes for any income year beginning within the 60-month period preceding January 1, 1997. Such entities will continue to be associations taxable as corporations until an election is made to be classified or disregarded the same as it is classified or disregarded for federal tax purposes. The grandfather rules will not apply to any entity that during the 60-month period preceding January 1, 1997, was not doing business in California, did not derive income from sources within California, and had no owner who was a resident of California.
This act also includes the change to the definition of "corporation" to include "banks" made by AB 1040 (Stats. 1997, Ch. 605). This change was made to prevent this act from chaptering out AB 1040. This provision is consistent with the act enacting Section 23038 and is applicable from the original effective date of that act.
Except as discussed above, this act is operative for taxable or income years beginning on or after January 1, 1997.
This act does not require any reports by the department to the Legislature.