All About Business March 2019 Tax News
Schedule IW, Limited Liability Company (LLC) Income Worksheet
The Schedule IW, Limited Liability Company Worksheet, is used to calculate an LLCs “Total California Income” to determine the amount of the LLC fee. For purposes of this worksheet, “Total California Income” means total income from all sources derived from or attributable to this state, not worldwide income. This includes income from all sources, such as income from trade or business activities, rentals, interest, and dividends.
For more information on "total income from all sources derived from or attributable to California," see the instructions for the Schedule IW instructions, on page 14 of the 2018 Limited Liability Company Tax Booklet (Form 568). Each LLC, regardless of whether it is a multiple member LLC or a single member LLC (SMLLC) must calculate total income and pay the fee.
If your LLC is a multiple member LLC that operates only in California, you will transfer the amount from Form 568, Schedule B, line 3, to line 1a of the Schedule IW. However, if the LLC conducts business both within and outside of California, line 1a of the Schedule IW will not be the same as Form 568, Schedule B, line 3. Schedule B does not have to reconcile with the LLC Income Worksheet since it includes total worldwide income, Schedule B amounts are also adjusted for differences between state and federal law, such as differences for depreciation and deductible taxes. Therefore, the LLC will need to assign its total income item by item to California, based on the rules for assigning sales under Revenue and Taxation Code (R&TC) Sections 25135 and 25136, and the regulations thereunder, as modified by regulations under R&TC Section 25137, if applicable, other than those provisions that exclude receipts from the sales factor.
Only SMLLCs whose income meets certain threshold amounts are required to complete Schedules B and K. SMLLCs which are disregarded entities, for income tax purposes, should prepare Schedule IW by entering the California amounts attributable to the disregarded entity from the member’s federal Schedule B, C, D, E, F (Form 1040), or additional schedules associated with other activities.
Important Reminders when completing the Schedule IW:
California law imposes an annual fee on every LLC that has “Total California Income” of $250,000 or more. “Total Income” for this purpose means gross income, plus the cost of goods sold, paid, or incurred in connection with the trade or business of the taxpayer attributable to California; and specifically excludes all allocations, distributions, or gains from another LLC that was already subject to the LLC fee. So when you are looking to determine the LLC’s “Total California Income”, don’t include gross receipts received from another LLC that were included in that LLC’s calculation of the fee. If the income has already been reported by another LLC, do not enter the amounts on the Schedule IW (LLC Income Worksheet).
Form 568, line 1 must match the amount from LLC Income Worksheet, line 17. A very common error is to enter Form 568, Schedule B, line 23 on Form 568, line 1, which in many cases causes us to increase the LLC fee amount when processing Form 568. LLCs will sometimes make adjustments when transferring the amount from the LLC worksheet, line 17 to Form 568, line 1.
The following lines of the LLC worksheet cannot be entered as a negative number: 1b, 2b, 3b, 3c, and 17. In addition, lines that state “(not losses)” should not be entered as negative amounts.
SMLLC doing business in California must file its own return and pay its own $800 annual tax and LLC fee based on its own income. Each LLC, regardless of whether it is a multiple member LLC or a SMLLC, must calculate total income and pay the fee at its level. Many times a parent LLC will incorrectly include total income from a lower-tiered SMLLC without also backing it out, and pay the fee only at the parent level. As discussed above, the parent can back out receipts that were already subject to the fee.
All apportioning LLCs, except SMLLCs, must include Allocation and Apportionment of Income (Schedule R) with Form 568.
California rental real estate. In computing California rental real estate income, line 8a is the rental real estate gross income from real estate held directly by a multiple member LLC (MMLLC). Line 8b is the pass-through rental income or loss from other rental activities. Line 8c is the total of line 8a and 8b.
Cancellation of debt is included in gross income for purposes of calculating the LLC fee. (IRC 61(a)(12).) California requires the income be reported in the year the debt was reduced.