California Minimum Franchise Fee of $800 IS being charged by CA on an Initial S Corporation Return

[lac2]

My S corp client received a notice from the CA FTB for the $800 franchise fee plus penalties and interest on the 2016 CA 100S return. The client filed to do business in CA for the first time in November of 2016 but had no CA source income or any presence in CA until 2017. The client has been in business in FL for many years. The CA FTB claims Lacerte is NOT calculating the franchise fee correctly at $0 due and have assessed the fee of $800 plus penalties and interest of $51.64. I was on the phone with Lacerte for 1 hour and 49 minutes and received no resolution to this issue. California claims Lacerte is wrong and Lacerte "seemingly" is claiming California is wrong although I am not certain yet of Lacerte's position on this matter. I marked the box that this is the first CA tax return being filed for this client. I entered the Nov 2016 date business began in CA. The system did not generate the franchise fee. CA FTB instructions "seem" to support that. CA FTB said today that Lacerte is incorrect and the $800 is owed. I don't know which party is correct.

[sjrcpa]

I don't know either but I know you are not going to win an argument with CA over the $800.

[abctax55 · Accepted solution]

A lot here...but see if it helps:

¶23-201 General rules for minimum franchise taxThursday, January 25, 2018 | By: Cal Tax

Note: For a discussion of the California corporate alternative minimum tax, see ¶26-200.

Generally, all corporations incorporated, organized, qualified, or registered to do business in California must pay an $800 minimum franchise tax each year until dissolved. (R&TC §23153) The minimum franchise tax must be paid whether the corporation is active, inactive, operates at a loss, or files a return for a short-period return.

There are two exceptions: The 15-days-or-fewer rule and the first-year-free rule.

15-days-or-fewer rule

Under R&TC §23114, a corporation is not subject to the minimum franchise tax if it did not do business in California during the taxable year, and the taxable year was 15 days or fewer.

For a portion of a month to be disregarded under this rule for a new corporation, its Articles of Incorporation would have to be filed no sooner than a certain day depending on the length of the month:

• A 28-day month: on the 15th day or after;
• A 29-day month: on the 16th day or after;
• A 30-day month: on the 16th day or after; or
• A 31-day month: on the 17th day or after.

According to the FTB, a corporation that qualifies under R&TC §23114 is not required to file a tax return for the short period.

“First-year-free” rule

A corporation is exempt from the minimum franchise tax for its first year, which is paid as the first estimated tax payment. However, the corporation must pay tax on the first year’s income. For example, a corporation that formed in 2017 and had net income of $1,000 for the 2017 taxable year must pay franchise tax at 8.84% (1.5% for S corporations). (R&TC §23153)

The minimum franchise tax forgiveness rule does not apply to:

• Limited partnerships;
• Limited liability companies (not classified as corporations);
• Limited liability partnerships;
• Charitable organizations;
• Regulated investment companies;
• Real estate investment trusts;
• Real estate mortgage investment conduits;
• Financial asset securitization investment trusts;
• Qualified Subchapter S subsidiaries;
• Credit unions; or
• Corporations that reorganize solely to avoid payment of the minimum franchise tax.

An LLC that elects to be taxed as a corporation in the first year is not subject to the minimum tax.

First-year-free and 15-day rules

Businesses that incorporate within 15 days of the end of their annual accounting period may disregard that taxable year when determining their eligibility for the first-year minimum franchise tax exemption if they do no business in that taxable year. (R&TC §23114)

This means that a corporation that qualifies for forgiveness of the $800 minimum franchise tax under R&TC §23114 may use the first-year-free rule for the next year. (R&TC §23153)

See Example 23-1.

Example 23-1: Short Year, Inc. files Articles of Organization on December 17, Year 1, and elects a calendar year. However, Short Year does no business until January 2, Year 2, so it is not required to file a tax return and is not subject to the $800 minimum franchise tax for Year 1. (R&TC §23114)

Short Year is also not required to pay the $800 minimum franchise tax for Year 2. However, Short Year must pay tax on its net income at the corporate rate.

[George4Tacks]

CA Pub 1060 https://www.ftb.ca.gov/forms/misc/1060.pdf

When Your Tax Year is Less Than 15 Days (15-Day Rule) 

Corporations with a first tax year of 15 days or less will not have a filing requirement if they meet both of the following: 

• Incorporates within the last 15 days of their tax year 

• Conducts no business during those 15 days

[jdtaxprep]

Your FTB person is wrong.

Cite them to CA Revenue & Taxation Code Section 23153(f)(1) and 17941(d) if the S corp. is an LLC.

"(f) (1) Notwithstanding subdivision (a), every corporation that incorporates or qualifies to do business in this state on or after January 1, 2000, shall not be subject to the minimum franchise tax for its first taxable year."

If the entity is an LLC, also cite them to section 17941(d):

"(d) For purposes of this section, “limited liability company” means an organization, other than a limited liability company that is exempt from the tax and fees imposed under this chapter pursuant to Section 23701h or Section 23701x, that is formed by one or more persons under the law of this state, any other country, or any other state, as a “limited liability company” and that is not taxable as a corporation for California tax purposes."

[mtlmihelich]

So for a 1st year S Corp aren't the min tax and the franchise tax the same thing ?  In your example the tax due would be $15 ($1000 * 1.5%).  But if the min franchise tax is $800 ... and it's waived for year 1 ... wouldn't the Year 1 tax due be $0 ?  If this was not year 1 they would only owe $800 (1.5% of up to $53K of income). 

Lacerte is calculating the tax based on 1.5% of the income and does not seem to recognize that it is a 1st year return.  Thoughts ?  Do I have this all wrong ?  Thanks