All About Business October 2019 Tax News
More about the LLC fee
In our March 2019 All About Business article, Schedule IW, Limited Liability Company (LLC) Income Worksheet, we addressed the use of the Schedule IW to calculate an LLC’s “Total California Income” to determine the amount of the LLC fee. We also explained that the definition of total income for purposes of calculating the LLC fee excludes all allocations, distributions, or gains from another LLC that was already subject to the LLC fee.
In that article we explained a very common error is to enter the figure from line 23 of the Form 568, Schedule B, onto line 1 of the Form 568, which in many cases causes us to increase the LLC fee amount when processing Form 568. Form 568, line 1 should not contain the figure from line 23 of the Form 568 Schedule B, but instead must match the amount from line 17 of the LLC Income Worksheet Schedule IW.
We also stated that, in many instances, a parent LLC will incorrectly include total income from a lower-tiered single-member limited liability company (SMLLC) that is a disregarded entity without backing it out, and pay the fee only at the parent level. As discussed in our March 2019 article, the SMLLC pays the fee at the SMLLC level and the parent LLC are to exclude receipts that were already subject to the fee.
We have received several calls asking about the proper calculation of a parent LLC’s fee when the parent LLC owns an SMLLC that is a disregarded entity. SMLLC level and the parent LLC excludes receipts that were already subject to the fee.
Under California law, every LLC doing business and subject to tax under Revenue and Taxation Code (R&TC) Section 17941 is required to file a form 568. Additionally, a SMLLC that is disregarded for federal income tax purposes is still subject to the annual LLC tax under R&TC Section 19741, the LLC fee under R&TC Section 19742, and LLC return requirement under R&TC Section 18633.5 for California tax purposes. (R&TC Section 23038(b)(2)(B)(iii)).
A SMLLC subject to the annual LLC tax is required to file Form 568 and complete Schedule IW. Disregarded SMLLC's that do not meet the filing requirements to complete Schedule B or Schedule K are required to prepare a Schedule IW by entering the California amounts attributable to the disregarded SMLLC from the member’s federal Schedule B, C, D, E, F (Form 1040) if the member is an individual, Form 1120/1120-S if the member is a corporation, or additional schedules associated with other activities. For example, if a SMLLC has IRC Section 1231 gains, the SMLLC will need to get the amount from the schedule containing that information, such as Form IRS 4797 or FTB Schedule D-1 (540), and enter the amount on line 14 of the Schedule IW.
If the LLC conducts business within and outside of California, the LLC must assign its total income on Schedule IW, item by item, to California.
If an LLC will have "total income" of $250,000 or more, the LLC will have to pay a fee. As discussed further below, LLCs must estimate and pay the fee by the 15th day of the 6th month of the current tax year.
California Income Rounded
|If the total California income rounded to the nearest whole dollar is:||The fee amount is:|
|$250,000 - $499,999||$900|
|$500,000 - $999,999||$2,500|
|$1,000,000 - $4,999,999||$6,000|
|$5,000,000 or more||$11,790|
When it comes to determining the LLC fee that the parent LLC will pay, the law states “'total income from all sources derived from or attributable to this state' shall not include allocation or attribution of income or gain or distributions made to a limited liability company in its capacity as a member of, or holder of an economic interest in, another limited liability company if the allocation or attribution of income or gain or distributions are directly or indirectly attributable to income that is subject to the payment of the fee described in this section.” (See R&TC Section 17942, subdivision (b).)
LLCs with an ownership interest in a pass-through entity other than an LLC, e.g., a general or limited partnership interest, must report their distributive share of the pass-through entity’s “total income from all sources derived from or attributable to this state.”
The fee imposed by R&TC Section 17942 is to be estimated and paid on or before the 15th day of the 6th month of the current taxable year. (See R&TC Section 19742(d)(1).) This generally is June 15th as most LLC are required to file on a calendar year. For fiscal year LLCs, the estimated fee is due on the 15th day of the sixth month of the current fiscal year.
A penalty of 10% of the amount of any underpayment by law is to be added to the fee. (See R&TC Section 19742(d)(2).) There is no reasonable cause exception to the imposition of this penalty. The law provides an exception, which states, “A penalty shall not be imposed with respect to any fee estimated and paid under this section if the amount paid by the date prescribed in this subdivision is equal to or greater than the total amount of the fee of the limited liability company for the preceding taxable year.”