California S-Corp Franchise Tax / Filing Requirement

Technical topics regarding tax preparation.
#1
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I have a customer that created a California S-Corp in January 2017. The corporation has never been "active" and as of February 2018, he is currently in the process of dissolving the corporation.

First question:
My understanding is that California does not impose the $800 min franchise fee for the 1st year (2017) of the corporation's existence. But does the corporation still have a *filing requirement*? It had zero activity so the tax return would be pretty much all zeros. I'm unclear if I need to file a 1120S & 100S return. But I don't want to run afoul of the failure to file penalty of $195/mo. Any thoughts?

Second question:
If the corporation is dissolved in the 1st quarter of 2018, is it still liable for the $800 min franchise fee? I think the answer is yes, but I was wondering if there is any way to get out of paying it.

Thank you.

Regards,
Bryan
 

#2
dave829  
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S corporations are required to file returns regardless of whether they have any income, deductions, gains, losses or credits. See Int. Rev. Code sec. 6037 (Federal), Calif. Rev. & Tax’n Code sec. 18601(d).

For the year in which the S corporation is dissolved, there are rather complex rules regarding the $800 minimum franchise tax. Take look at Rev. & Tax’n Code sec. 23332, here:

http://leginfo.legislature.ca.gov/faces ... &article=8.
 

#3
Wiles  
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If there was no activity after 12/31/17, then you can cancel it as of that date. You can still process that paperwork in 2018 and save the client the $800 for 2018. Mark the 2017 tax return as final.
 

#4
dave829  
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Wiles wrote:If there was no activity after 12/31/17, then you can cancel it as of that date. You can still process that paperwork in 2018 and save the client the $800 for 2018. Mark the 2017 tax return as final.

That is, in fact, what Rev. & Tax’n Code sec. 23332(c) says, but in addition, the final 2017 return must be filed timely, and the corporation must file a certificate of dissolution with the California Secretary of State within 12 months of the due date of the final return.
 

#5
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New client had an existing CA S-Corp since 2015 and timely filed their 2017 1120-S, not marked final. We filed extensions for 2018, and do not believe that they pre-paid the 2018 $800 fee by 3/15/2018 as required. There was no activity in 2108 and they filed dissolution paperwork with an accepted date of 12/13/2018.

My understanding here is that IF the 2017 tax return was marked final and the dissolution paperwork was filed within 12 months, then they would not be liable for the $800 fee for 2018. However, under that rule would the dissolution need to be effective as of 12/31/2017? Does the fact that the dissolution was effective as of 12/13/2018 mean that a 2018 tax return is required along with the $800 fee? Or is it enough that the paperwork was filed with 12 months of the close of the 2017 tax year?

I was hoping to be able to amend the 2017 return marking it final and save the client $800 for 2018.
 

#6
dave829  
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Here’s R&TC sec. 23332(c), which I cited in #4 above:

(c)(1) A corporation shall not be subject to the minimum franchise tax imposed by this chapter for a taxable year if the corporation does all of the following:

    (A) Files a timely final franchise tax return for a taxable year with the Franchise Tax Board.
    (B) Does not do business in this state after the end of the taxable year for which the final franchise tax return was filed.
    (C)(i) In the case of a corporation other than a corporation described in clause (ii), files a certificate of dissolution or surrender with the Secretary of State, in accordance with Sections 1809, 1905, 2112, 6615, 8615, and 12635 of the Corporations Code and Section 3126 of the Financial Code, before the end of the 12-month period beginning with the date the final franchise tax return was filed.
      (ii) In the case of a limited liability company that is a corporation pursuant to subdivision (c) of Section 23038, files a certificate of cancellation with the Secretary of State, in accordance with Section 17707.02 or 17708.07 of the Corporations Code, before the end of the 12-month period beginning with the date the final franchise tax return was filed.
(2) For purposes of this subdivision, a “final franchise tax return” is a return filed pursuant to Section 18601 on or before the due date of the return, as extended, that the taxpayer designates in the manner prescribed by the Franchise Tax Board as the taxpayer’s final franchise tax return for purposes of the tax imposed under this chapter. A final franchise tax return for purposes of the tax imposed under this chapter is a return filed pursuant to Section 18601 where the taxpayer is not required to file a subsequent return to reflect the imposition of tax under this chapter.

So, you can see for yourself that amending the 2017 return to say that it is final won’t satisfy these requirements because the final return must be filed on or before the due date of the return, as extended. In addition, filing dissolution paperwork with the Secretary of State that listed 12/31/2018 as the effective date of the dissolution is a fact that FTB will point to in imposing the $800 tax for the 2018 year.
 

#7
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Thanks Dave. I did read through your link (much appreciated!) and pretty much figured they were stuck paying it, just looking for a way out. BTW, the dissolution paperwork did not list a date of 12/31/2018, it was processed with an effective date of 12/13/2018. Not that this matters at all in this scenario, just clarifying facts.
 


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