California’s 15-Day Rule - What is it and How Does it Work?
Short Tax Year
California law (R&TC Sections 17936, 17946, 17948.2 and 23114) contains provisions that operate to provide relief to business entities (limited partnerships, limited liability partnerships, limited liability companies, 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:
- Did not conduct business in the state during the tax year.
- The tax year was 15 days or less.
The short tax year of 15 days or less rule is explained in FTB Publication 1060, Guide for Corporations Starting Business in California. And when it comes to corporations, if the rule qualifies for the short-year 15-day rule, this period of time will also be disregarded for purposes of determining the corporation’s first year minimum tax waiver (see October 2012 and August 2011 Tax News for more information).
Under California law, a business entity may be able convert its legal form into another business entity type by filing the necessary paperwork with the Secretary of State (SOS), such as when a limited partnership converts into a limited liability company.
An entity that converts into another entity is effectively the same entity that existed before the conversion, except for tax purposes.
The converting entity ends its tax year on the date of conversion, while the converted entity does not begin its tax year until the next day.
The 15-day rule does not normally apply to entities involved in a conversion because they are usually continuously doing business during the both periods involved, so both the converting and converted entity will each have a filing requirement.
Unlike the short tax year discussed above, when it comes to determined due dates for payment and filing, every day counts, and a fractional month counts as a full month. California’s laws due dates are normally determined based on the 15th day of a specified month. For example, individuals and corporations generally have a requirement to make estimated tax payments on the 15th day of the 4th, 6th, and 9th month of the tax year and the 15th day 1st month following the end of the tax year. Tax returns are generally due on either the 15th day of the 3rd or 4th month after the close of a tax year depending on the type of tax return filed. Limited liability companies are required to pay their $800 annual tax on or before the 15th day of the 4th month of its tax year. Taxpayers who fail to timely file or make payments by the required dates are generally subject to penalties and interest.
We have been receiving inquiries from taxpayers who have received a bill for penalties and or interest, wanting to use a 15-day rule to disregard a month within a longer tax year. When it comes to counting months for a tax year (that is more than 15 days), there is no 15-day rule in the law. Any fraction of month counts as a full month whether it is at the beginning of a tax year, like the start of a new business, or at the end of a tax year.
For newly-formed LLCs, the $800 annual tax payment is due and payable by the 15th day of the 4th month after the LLC registers with the California SOS or the date it begins doing business, if business began before it registers with the California SOS. Any portion of a month is considered a full month for calculating the annual tax payment due date.
Example: LLC1, a newly-formed LLC, organizes as an LLC and registers with the California SOS on June 18, 2012. LLC1 begins doing business in California on August 14, 2012. Since LLC1 registered on June 18, 2012, the annual LLC tax is due by September 15, 2012 (by the 15th day of the 4th month). LLC1’s annual tax payment for taxable year 2013 is due by April 15, 2013. If LLC1’s fiscal year (June 1, 2013 – May 31, 2014) the annual tax payment for taxable year 2013, is due by September 15, 2013. The annual tax payment is due with Form FTB 3522, LLC Tax Voucher.
Based on your input that our instructions are unclear when it comes to counting a short formation month as the first month we will add language and an example to the 2012 Form 568, Limited Liability Return of Income.
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