Short Year, Fractional Month, California’s 15-Day Rule. What is it? How Does it Work?
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Short Tax Year
For corporations, the original due date of a short-period tax return is the 15th day of the 3rd month after the close of the short-period tax year. For partnerships and LLCs, the original due date is the 15th day of the 4th month after the close of the short-period tax year. The seven-month or six-month paperless extension also applies to this type of short-period tax return.
Fractional MonthWhen 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 be at the beginning of a tax year, such as the start of a new business, or at the end of a tax year.
Unlike the short tax year discussed above, when it comes to determining due dates for payment and filing, every day counts, and a fractional month will count as a full month. Throughout California law, 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 of the 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 being 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 that fail to timely file or make payments by the required dates are generally subject to penalties and interest.
15-Day RuleInactive business entities (Limited Partnerships, Limited Liability Partnerships, Limited Liability Companies and Corporations) with a short (15 days or less) tax year are not required to file a tax return for the short tax year, if they meet both of the following:
- They did no business in California during the tax year
- Tax year is 15 days or less
Waiver of TaxCalifornia law (R&TC Sections 17936, 17946, 17948.2 and 23114) contains provisions that operate to provide relief to business entities from the general requirement to pay the annual/minimum tax. The applicable law states business entities that meets both of these two requirements are not to be subject to the taxes and fees generally imposed on these business entities.
Since a business entity that meets the 15-day rule is not required to file a tax return, this time period is not considered the business entity's first tax year. The following tax year will be considered the business entity's first tax year.
Under California law, a business entity may be able to 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 both periods involved, so both the converting and converted entity will each have a filing requirement.
For more information, see FTB Publication 1060, Guide for Corporations Starting Business in California at ftb.ca.gov. For more filing information for LLCs, see FTB 3556 LLC MEO, General LLC Information.
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