Tax News June 2022

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Tax News is a monthly online publication to inform tax professionals, taxpayers, and business owners about state income tax laws, FTB regulations, policies and procedures, as well as events that may impact or provide valuable information for the tax professional community.

FTB also periodically releases Tax News Flashes to quickly notify subscribers of urgent time-sensitive information. Tax News Flashes are posted in the Newsroom with a Tax News Flash label.

Minimum essential coverage (MEC)

Proof of health care coverage

Beginning January 1, 2020, all California residents must either:

  • Have minimum essential coverage, known as qualifying health coverage, throughout the entire year
  • Obtain an exemption from the mandate requirement through Covered California
  • Qualify to claim an exemption through Franchise Tax Board, or
  • Pay a penalty when they file their state tax return

Individuals who participated in a government program such as Medicare or Medi-Cal receive a federal Form 1095-B. The taxpayers will keep this form for their records and they do not need to submit a copy with their tax return. FTB may need to verify health care coverage information that is provided by the taxpayer.

FTB will accept any of the following as proof of health care coverage:

  • Form 1095-A, Health Insurance Marketplace Statement
  • Form 1095-B, Health Coverage
  • Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
  • Statement of coverage from insurance company
  • Copy of a Medicare Health Insurance card that shows enrollment in Medicare Part A or Part C and a date the coverage began. Medicare Part B coverage by itself on a Medicare Insurance Card or on a Social Security SSA-1099 form does not qualify
  • Proof of insurance premiums paid for the year

FTB will not accept any hand written documents as proof of health care coverage.

Taxpayers filing with an ITIN

Taxpayers filing with an ITIN may have the health mandate penalty assessed. ITIN filers use an ITIN because they do not have a SSN. These taxpayers may qualify for an exemption.

For more information on FTB exemptions, go to FTB 3853 Instructions.

Schedule A review letters

Select taxpayers who reported large Schedule A itemized deductions will receive “Review Your State Tax Return – Total Itemized Deductions” letters

In January 2022, the Franchise Tax Board (FTB) began an outreach effort by sending Schedule A review letters. FTB will continue the outreach effort by sending review letters in May to taxpayers who reported large Schedule A itemized deductions on their 2019 tax returns that are "significantly higher than expected."

The purpose of the review letter is to encourage taxpayers to review their 2019 tax return, and current tax years, for any discrepancies. The letter informs the taxpayers of the type of deductions commonly overstated, where to find more information regarding what is deductible, and to file an amended tax return if necessary.

This review letter does not constitute an audit. The tax returns remain subject to audit until the expiration of the statute of limitations. The taxpayer should maintain documentation to substantiate their itemized deductions and ensure they are deductible. Itemized deductions are found on Schedule A (Form 1040) for Federal purposes and adjusted for California purposes on Schedule CA (Form 540). Due to differences between California and federal tax law, California itemized deductions may differ from federal itemized deductions.

We started this outreach effort by sending a small volume of review letters in May, and will increase the volume over the next several months. Future outreach will include other issues and tax years.

Senate Bill (SB) 113 credit ordering rules

SB 113 and the effects on Revenue and Taxation Code section 17039 and the Other State Tax Credit

In 2021 the California Legislature enacted Assembly Bill (AB) 150 which provides relief for the federal $10,000 limitation on the state tax deduction. AB 150 created California Revenue and Taxation Code (R&TC) sections 19900 and 17052.10. R&TC section 19900 provides a Pass-through entity (PTE) elective tax for qualified entities doing business in California to annually pay an elective tax computed at 9.3 percent for the year in which the election is made. In turn R&TC section 17052.10 provides for a Pass-through entity elective tax Credit (PTE Credit) for qualified taxpayers against net tax in the amount equal to the qualified amount.

In 2022, the California Legislature enacted SB 113 which made changes to the PTE elective tax and PTE Credit. SB 113 eliminated the tentative minimum tax (TMT) limitation. This change was retroactive and would apply beginning with the 2021 taxable year. Therefore, the PTE Credit could reduce the amount of tax due below the TMT.

SB 113 made additional retroactive changes for taxable years beginning on or after January 1, 2021 by expanding certain definitions under the PTE elective tax and PTE Credit. First, qualified net income now includes a qualified taxpayer's guaranteed payments received from the qualified entity subject to California personal income tax. Second, a qualified entity can now have a partnership as a direct owner. And third, a qualified taxpayer who is a partner, member, or shareholder of a qualified entity can be a disregarded single member limited liability company (SMLLC), as long as the disregarded SMLLC is solely owned by an individual, fiduciary, estate, or trust subject to California personal income tax.

SB 113 also made one change for taxable years beginning on or after January 1, 2022. It amended R&TC section 17039, the credit ordering statute. Prior to SB 113, credits were allowed against net tax in the following order:


(1) Credits that do not contain carryover or refundable provisions, except those described in paragraphs (4) and (5).

(2) Credits that contain carryover provisions but do not contain refundable provisions, except for those that are allowed to reduce "net tax" below the tentative minimum tax, as defined by section 17062.

(3) Credits that contain both carryover and refundable provisions.

(4) The minimum tax credit allowed by section 17063 (relating to the alternative minimum tax).

(5) Credits allowed to reduce the "net tax" below the tentative minimum tax, as defined by section 17062.

(6) Credits for taxes paid to other states allowed by Chapter 12 (commencing with section 18001).

(7) Credits that contain refundable provisions but do not contain carryover provisions.

Based on R&TC section 17039, prior to SB 113, the PTE Credit would fall under R&TC section 17039(a)(2) because it contains a carryover provision but does not contain a refundable provision. The Other State Tax Credit (OSTC) would fall under R&TC section 17039(a)(6). Therefore, a taxpayer would have to use its PTE Credit prior to using the OSTC. This created the possibility that the OSTC could not be used because the OSTC does not contain a carryover or refundable provision. To address this concern, SB 113 amended the credit ordering statute.

With the passing of SB 113, R&TC section 17039 now orders credits against net tax in the following order:

(1) Credits that do not contain carryover or refundable provisions, except those described in paragraphs (4) and (5).

(2) Credits that contain carryover provisions but do not contain refundable provisions, except for those that are allowed to reduce "net tax" below the tentative minimum tax as defined by Section 17062.

(3) Credits that contain both carryover and refundable provisions.

(4) The minimum tax credit allowed by Section 17063 (relating to the alternative minimum tax).

(5)(A) For taxable years beginning on or after January 1, 2002, and before January 1, 2022, credits that are allowed to reduce "net tax" below the tentative minimum tax, as defined by section 17062.

(B) For taxable years beginning on or after January 1, 2022, credits that are allowed to reduce "net tax" below the tentative minimum tax, as defined by section 17062, except the credit described in paragraph (7).

(6) Credits for taxes paid to other states allowed by Chapter 12 (commencing with section 18001).

(7) For taxable years beginning on or after January 1, 2022, the credit allowed by section 17052.10 (relating to the elective tax under the Small Business Relief Act).

Now, for taxable years beginning on or after January 1, 2022, the OSTC, under (a)(6), would be taken before the PTE Credit, under (a)(7). The change in credit ordering affords taxpayers the benefit of utilizing both their OSTC and PTE Credit or carrying over the PTE Credit.

Please be aware that SB 113 changed the ordering of the credits, but SB 113 did not change the OSTC or its calculation. Therefore, the calculation of the OSTC remains unchanged. The amount of the OSTC is computed as the lesser of:

1. California tax liability × (double taxed income ÷ California adjusted gross income)

2. Other State tax liability × (double taxed income ÷ other state’s adjusted gross income)

The Schedule S instructions indicates that line 2 of the Schedule S is the taxpayer's California tax liability without reduction for the OSTC[1]. This means that the California tax liability would take into account all other tax credits—including the PTE Credit for the calculation. This is because the OSTC cannot be given for a tax liability that is satisfied by other credits[2].

While SB 113 changed the credit ordering statute, the OSTC calculation remains unchanged. Consequently, for OSTC purposes, the calculation of the California tax liability will continue to be computed as the taxpayer's California tax liability without reduction for the OSTC, but will be reduced by the amount of all other credits, including the PTE Credit.

[1] California Schedule S Instructions

[2] Legal Ruling 2017-01

Limited liability company (LLC) fee

LLC fee estimated payment due June 15

Generally, all LLCs, not classified as a corporation, must pay the annual LLC fee if it is organized, doing business, or registered in California and has total income from all sources derived from or attributable to California of at least $250,000.

California income for LLC fee purposes is gross income plus the cost of goods sold, that are paid or incurred in connection with the trade or business of the taxpayer.

For calendar year LLCs, June 15 is the date the estimated LLC fee is due. For fiscal year LLCs, the estimated fee is due on the 15th day of the sixth month of the current taxable year.

LLC fee by total rounded income
Total California income rounded to the nearest whole dollar Fee amount

$250,000 - $499,999


$500,000 - $999,999


$1,000,000 - $4,999,999


$5,000,000 or more


LLCs should use Form 3536, Estimated Fee for LLCs, to make their estimated fee payments. LLCs can also use our Web Pay feature to make their estimated fee payment, go to, and search for Web Pay.

The LLC current estimated fee requirement is 100 percent of the previous taxable year estimated fee. If the payment is late or less than the amount owed, we will assess a 10 percent penalty on the underpaid fee. The underpaid fee is the difference between the current taxable year LLC fee, and the estimated fee paid on or before the estimated fee due date.

The penalty will not be imposed if the LLC’s estimated fee payment is equal to or greater than their prior year’s LLC fee. For purposes of whether the LLC estimate fee penalty applies, there is no requirement that the prior tax year be a full 12 months. Also, there is no penalty for the LLC’s first year filing in California.

Closing a business entity

How to close a California Business Entity

Business entities doing or transacting business in California, or registered with the California Secretary of State (SOS), can dissolve, surrender, or cancel when they cease operations in California and need to terminate their legal existence here.

  • Domestic corporations (originally incorporated in California) may legally dissolve.
  • Foreign corporations (originally incorporated outside California) may legally surrender.
  • Limited liability companies (LLC) and partnerships (both domestic and foreign) may legally cancel.

Steps to Dissolve, Surrender, or Cancel a California Business Entity

Dissolving, surrendering, or canceling a California business entity is a multi-step, multi-state agency process that has requirements with the Franchise Tax Board (FTB) and SOS.

Requirements for FTB

  • File all delinquent tax returns and pay all tax balances, including any penalties, fees, and interest.
  • File the final/current year tax return. Check the applicable Final Return box on the first page of the return, and write “final” at the top of the first page. All tax returns remain subject to audit until the statute of limitations expires.
  • Must cease doing or transacting business in California after the final taxable year.

Requirements for SOS

  • File the appropriate dissolution, surrender, or cancellation form(s) with the SOS within 12 months of filing the final tax return.

If a business entity is suspended or forfeited, it will need to go through the revivor process and be in good standing before being allowed to dissolve, surrender, or cancel. To revive a suspended or forfeited business entity, the business owner must:

  • File all delinquent tax returns.
  • Pay all delinquent tax balances, including penalties, fees, and interest.
  • File a revivor request form.

Additional Steps

There are some additional steps to be handled when closing a business entity. They include:

  • Notify all creditors, vendors, suppliers, clients, and employees of the intent to go out of business.
  • Close out business checking account and credit cards.
  • Cancel any licenses, permits, and fictitious business names.
  • Consider publishing a statement in a local newspaper of general circulation near the principal place of business that the limited liability company is no longer in business.

Voluntary Dissolution/Cancellation

If certain qualifications are met, a business entity may be able to voluntarily dissolve. A qualified domestic corporation or qualified domestic limited liability company can request for voluntary administrative dissolution/cancellation. With a written request, a business must certify it:

  • Is not actively engaging in any transaction for the purpose of financial or monetary gain or profit
  • Has stopped doing business or never did business
  • Does not have any remaining assets

Once the SOS formally dissolves or cancels a business, we may abate:

  • Unpaid qualified taxes
  • Interest
  • Penalties

For more information, go to our voluntary administrative dissolution/cancellation webpage.

Additional Resources

Here are some additional resources that are available for more information:

Chief counsel corner

FTB Legal Ruling issued on California's Market-Based Rules

On March 25, 2022, the Franchise Tax Board issued Legal Ruling 2022-01 relating to the application of California's market-based rules at Revenue and Taxation Code (R&TC) section 25136 and California Code of Regulations, title 18, section (Regulation) 25136-2.

What the Legal Ruling does

The Legal Ruling presents the proper application of rules related to the assignment of sales from services to this state, for apportionment purposes. The Legal Ruling's analytical framework uses the statutory elements of R&TC section 25136, which requires taxpayers to assign sales of services to this state to the extent the taxpayer's purchaser received the benefit of its service in this state.

The Legal Ruling calls for an examination of:

  1. Who is the taxpayer's customer?
  2. What is the service the taxpayer provides?
  3. What is the benefit of that service to the customer?
  4. Where is that benefit located?

The Legal Ruling applies the analysis to three types of fact situations commonly discussed by the taxpayer community, including a scenario in which a subcontractor receives gross receipts from a primary contractor to perform services for a third party. The Legal Ruling provides that these services are assigned to the location where the taxpayer subcontractor engages the primary contractor's clients, because that is the location where the primary contractor's services are improved.

The Legal Ruling also retroactively revokes Chief Counsel Ruling (CCR) 2015-03 and CCR 2017-01. To the extent the Legal Ruling conflicts with any other prior guidance of the FTB, the Legal Ruling supersede such guidance.

Who the Legal Ruling applies to

The Legal Ruling applies to apportioning taxpayers with sales from services, specifically taxpayers who provided services to their customers and assigned sales to California based on R&TC section 25136 and Regulation 25136-2. The Legal Ruling also impacts taxpayers whose filing obligations and tax liability are determined in reference to Section 25136 and Regulation 25136-2, such as non-resident partners of apportioning partnerships doing business in California and sole proprietors engaged in a multistate business.

What happens if a taxpayer followed either CCR 2015-03 or 2017-01 when determining its tax filing position

The Large Corporate Understatement Penalty (LCUP) will not be assessed against these taxpayers. An Accuracy Related Penalty (ARP) will also not apply, assuming the taxpayer filed a California return. However, if a taxpayer followed the CCRs' analyses to determine it did not have a filing requirement, and consequently filed a late return, a delinquent penalty will apply. Furthermore, interest will be assessed on any underpayment amounts resulting from a taxpayer's reliance on the CCRs.

Ask the advocate

Brenda Voet, EA
Taxpayers’ Rights Advocate

New Look for Tax News

I am excited to share the refreshed Tax News layout and design. Same informative articles we’ve always provided, just with a new look and feel.

The first thing you may notice is we have included a descriptor for Tax News to define its intent which will be included on the web page and each edition for new and returning subscribers.

We also replaced the “Table of Contents” with an “In this edition” section. This option allows you to scroll down the page and read each article in order, or select the article you would like to read and be taken directly to it. To further improve the customer experience, we added a “Submit Your Idea” button in the “Participate box” and “Subscriber” button - both located at the top of the webpage.

As a follow up to our December 2021 survey, we are excited to share that we were able to successfully streamline our processes and eliminate the PDF version and still provide you a print friendly web format.

Refreshing the Tax News layout is just the beginning. We are also working to update our Taxpayer Advocate Services and Tax Professionals webpages to better serve you and the public. These updates should be available by the end of June, so keep an eye out and let us know what you think. For example, we are paying close attention to user behavior through analytics and will move services around to ensure you get the information you need. We also plan to relocate our “Report an issue” option so you can identify “big-picture” problems directly to the Taxpayers’ Rights Advocate Office (TRAO).

“Big-Picture” problems are defined as:

  • Affect multiple taxpayers
  • Involve Franchise Tax Board (FTB) systems, policies, and procedures
  • Protect taxpayer rights, reduce burden, ensure equitable treatment, or provide essential taxpayer services

When you let us know about these problems, we can work with FTB program areas to analyze the problem and recommend/implement solutions so we can improve the services we provide to California taxpayers and to you.

I look forward to providing more details for other improvements we are working on in future editions of Tax News.

Tax News Flash links

Tax News Flashes are real-time FTB news releases which inform taxpayers of the latest breaking tax-related events. These articles are published separately from our monthly Tax News edition.

News Flash articles sent in May:

Education and outreach

We provide education and outreach to our tax professional community by providing presentations on tax-related issues and small business.

If interested, see our education and outreach page to request a speaker.

View our calendar for presentations and events that may interest you.