Big Changes Are Happening to California Tax Law

By: Tamara B. Pow, Esq.

As of July 1 st , important changes are now being implemented regarding the administrative side of California tax law. The state Legislature has restructured the Board of Equalization (BOE) into three separate entities: the BOE, the California Department of Tax and Fee Administration (CDTFA), and the Office of Tax Appeals (OTA). This change is a result of the recently enacted Taxpayer Transparency and Fairness Act of 2017, signed into law by Governor Jerry Brown during the last week of June.

The reason for this new look, as described in the bill itself, came from a review by the Attorney General, the California State Auditor’s Office, and the State Personnel Board, which determined that the BOE’s workplace culture and practices severely hindered its ability to report exact and reliable information to the public, the administration, and the state Legislature.

Under the new law, the CDTFA will assume the BOE’s administrative and regulatory duties for managing programs involving sales and use taxes, and other business taxes and fees. The CDTFA will be housed within the Government Operations Agency, where the BOE used to be operated, and taxpayer and fee payer account information services and deadlines will remain the same until further notice. Governor Brown has appointed David Botelho, of San Leandro, as the Acting Director of the CDTFA. The BOE, on the other hand, will continue to administer property taxes, alcoholic beverage taxes, and insurance taxes as an independent agency.

The other important change is the creation of the OTA, which will hear tax appeals from the Franchise Tax Board, the BOE, and other tax collecting agencies. The OTA, which will be formed as an independent entity, has also been established as of July 1 st , 2017, but will not begin full operation and hearing appeals until January 1 st , 2018. In the meantime, a Director for the organization will be appointed from within the OTA and the governance structure will need to be established. Stakeholder meetings will be scheduled as the OTA takes form and prepares to take over cases for which the BOE will no longer have jurisdiction after December 31, 2017. The OTA will set up numerous three-member panels of Administrative Law Judges to hear tax appeals in Sacramento, Fresno, and Los Angeles. The number of panels set up within each city will depend on the volume of cases occurring in each geographical location.

More transition information can be found for the new department on its website, www.cdtfa.ca.gov and on www.boe.ca.gov .

Urgent LLC Alert – Erroneous Tax Refunds

By: Tamara B. Pow, Esq.

Very recently, the Franchise Tax Board (FTB) has had to notify certain California limited liability companies (LLCs) that their 2017 LLC annual tax/estimated fee payment were misapplied to the 2016 tax year, which resulted in the FTB mistakenly sending out refund checks to some LLCs. This issue arose due to a glitch in the software of some tax software companies.

While it is not known how the software glitch occurred, what has been determined is that the software incorrectly applied the Account Period Begin on the 2017 LLC annual tax/fee payment as 01.01.16 instead of the correct begin date, 01.01.17. The Account Period End date was correctly applied as 12.31.17.

In essence, the erroneous refund checks issued by the FTB due to the glitch are based on last year’s estimated income return rather than this year. As a result, LLC payments for this year must be resubmitted by July 15 th , 2017 in order to avoid accruing additional interest and facing penalties. If a refund check has been received, cash the check and then resubmit the payment by the same July 15 deadline . Affected accounts will be reviewed by the FTB after July 15 th and applicable adjustments will be made at that time.

Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San Jose, California where she practices business and real estate law including representing real estate LLCs and other business entities. Her personal experience managing and investing in real estate limited liability companies as well as her MBA and real estate brokers license help her in advising owners of limited liability companies and other business entities.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

LLC Tax Reminders

By: Tamara B. Pow, Esq .

As many of you are aware, annual fees for California limited liability companies were due June 15 th . So here are a few pointers to keep in mind as you are filing forms and paying fees. While the due date for filings may have changed this year for some LLCs, the estimated fee due has not.

LLC Fee:

The LLC fee covers income originated from activity within the state of California only, rather than income derived from all applicable markets worldwide. So if an LLC does business worldwide, or even in more than one state in the U.S., only the income earned within the state of California is included in the LLC gross receipts calculation. Even though taxpayers have not reached the midway point to the year, they must still estimate their total 2017 annual income based on the first five and a half months of the year. If there is a remaining balance left as a result of underestimating your total income for the year, that balance must be paid by the next due date for filing an LLC’s tax return (March 15 th for either LLCs taxed as a partnership or single-member LLCs owned by a passthrough entity; April 15 th for all other LLCs).

The estimated fee is required to be at least 100% of the current taxable year fee. If the tax- paying LLC’s estimated fee payment is late or less than the amount owed, the Franchise Tax Board (FTB) will assess an underpayment penalty, which amounts to 10% of the difference between the fee the taxpayer paid and the fee that is owed. Be aware that there is no reasonable cause exception for this penalty. However, there are two other types of exceptions. First, there is a prior-year exception if the timely paid estimated fee is equal to or greater than the fee from the prior year. Second, there is no penalty for an LLCs first-year filing in California, since there is no prior year to begin with.

LLCs Taxed as Corporations:

For LLCs generating annual receipts below $250,000, within the state of California only, the annual fee amount for 2017 is $0. For those generating from 250k up to 500k, the annual fee is $900. For those making from $500k up to $1 million, the annual fee is $2,500. For LLCs earning more than $1 million but less than $5 million, the fee is $6,000. And finally, for LLCs earning $5 million or more per year in the state of California, the 2017 annual fee for LLCs is $11,790.

The next few reminders apply to LLCs that choose to be treated as C corporations or S corporations, who are not required to pay the LLC fee or the annual tax, although C corporations and S corporations are subject to the $800 minimum franchise tax. Furthermore, a single member LLC that has decided not to be taxed as a corporation, but is owned by a C or S corporation, is subject to the annual tax and fee. In this case, the LLC is required to file a Form 568, Limited Liability Company Return of Income, to pay the tax and fee, and will also be subject to the estimated fee requirements.

As for LLCs that are treated as C or S corporations, they must file either Form 100, California Corporation Franchise or Income Tax Return, or Form 100-s, California S Corporation Franchise or Income Tax Return.

Even though the deadline for filing the LLC fee has passed for this year, keep these amounts in mind so that you can make sure you are paying correctly. And if you have not paid your LLC annual fee, make sure you pay it immediately to avoid further penalties and interest.