What is the 15-day rule? December 2019 Tax News

When deciding to form a corporation or LLC, it is important to keep the 15-day rule in mind.

The 15-day rule only applies to short tax years that are 15 days or less.

The 15-day rule states that inactive business entities (Limited Partnerships, Limited Liability Partnerships, Limited Liability Companies and Corporations) with a tax year of 15 days or less are not required to file a tax return or pay the $800 annual/minimum tax, if they meet both of the following:

  • They did no business in California during the tax year
  • Their tax year is 15 days or less

For example, if an entity filing on a calendar year basis is formed on December 17th 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 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 tax year and the entity will not have to pay the franchise tax until the 15th day of the 3rd month after the close of the tax year.

For example, if a corporation filing on a calendar year basis incorporates on December 20, 2019 and does not conduct business from December 20, 2019 to December 31, 2019, then it meets the 15-day rule and does not need to file a 2019 tax return. The corporation’s first tax year will start on January 1, 2020.

For more information on the 15-day rule for LLCs and corporations, please see our LLC Guide and Corporations Guide.