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Short Period Return for an S Corporation Termination

In last month’s issue, we discussed when a short period return was due. Now we will discuss the short-year return for an S corporation termination.

Corporations or limited liability companies treated as corporations, having a valid federal S election, automatically become California S corporations. This applies to all S status corporations, whether or not they are registered with California’s Secretary of State.

Since the corporation becomes an S corporation automatically for California purposes, the corporation does not file an S corporation election, but attaches a copy of their federal confirmation letter with their first California return. The federal S corporation election is binding and the corporation cannot make a separate state election to be treated as a C corporation for California tax purposes.

Therefore, if there is a federal termination of a corporation’s S election, the termination also applies to California. Depending when the termination occurs, the corporation may need to file two short-period returns. Each short period return will be deemed to be a separate tax year and is subject to the annual minimum tax. 

For example:

ABC, Inc. is an S corporation with a calendar year ending. On June 30, 2012, the S corporation election terminates.

  • For January 1, 2012 to June 30, 2012 ­— the S corporation will file and pay its tax liability, but not less than the minimum franchise tax.
  • For July 1, 2012 to December 31, 2012 the C corporation will file and pay its tax liability, but not less than the minimum franchise tax.

However, when a corporation must file a short period return for federal purposes, the corporation must also file a short period return with the state (R&TC Section 24634). The original due date of the return is the same due date as the federal return. In the example above, the due date of both returns will be March 15, 2013. In addition, the corporation will be eligible for the state automatic seven-month extension to file the state tax return.

For more information, see FTB Publication 1060, Guide for Corporations Starting Business in California.

Back to December 2012 Tax News