California LLCs – Franchise and LLC Fees
We are seeing an increase in taxpayer investments in California properties as well as investments in LLCs doing business in California.
An LLC is considered to be “doing business” in California if it is organized or commercially domiciled in California.
In addition, an LLC may be considered doing business in California if the taxpayer actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California. For example, renting or even advertising a rental is evidence of “doing business.” (If the residence is only for personal use by the owner of the LLC, then any related monetary transactions do not constitute “doing business.”)
A taxpayer or LLC is also considered to be “doing business” in California if any one of the following California sales, property, or payroll tests are met. For 2014, a taxpayer is “doing business” if:
- the value of their California real and tangible property exceeds the lessor of $52,956 or 25% of the taxpayer’s total real and tangible personal property
- California sales exceed the lesser of $529,562 or 25 percent of the taxpayer’s total sales
- Amounts paid for compensation in California exceeds the lesser of $52,956 or 25 percent of the total compensation paid by the taxpayer.
When an LLC meets the definition of doing business, they must a California tax return and are liable for the $800 franchise fee as well as subject to an LLC fee which is applied on a graduated scale based on total income attributable to California (The minimum LLC fee is $900.) If you have any investments in California and have questions regarding possible tax liabilities, please consult your Somerset advisor.
California Rental Properties Subject to Withholding
Income from rents and royalties from assets located in California are subject to withholding for non-California resident owners.
Specifically, payments from property management companies to property owners are subject to withholding. (Tenants are not required to withhold when payments are made directly from tenant to nonresident owner.) Although withholding is optional on the first $1,500, withholding is required for payments made to a non-resident payee after the first $1,500 of payments.
In addition, if the property generates a loss or minimal income, taxpayers can qualify for a reduced withholding which can be obtained by filing Form 589, Nonresident Reduced Withholding Request and obtaining written approval.
Withholding does not relieve taxpayers from filing a non-resident California return. Either the LLC or corporation must file a composite return and pay the partner/shareholder’s tax liability or the taxpayer must file an individual non-resident California return.
California Webpage Provides Guidance on Apportionment and
Assignment of Sales
The California Franchise Tax Board has created a webpage that provides guidance for corporation franchise and income and personal income purposes on the single sales factor apportionment mandate imposed in November of 2012 and discusses the rules for assigning sales to California.
For taxable years beginning on or after January 1, 2013, all apportioning trades or businesses, must apportion their business income to California using a single sales factor, with the exceptions of businesses that derive more than 50% of their gross receipts from agricultural, extractive, savings and loan, or banking or financial business activities.
Sales of tangible personal property are assigned to California if the property is delivered or shipped to a purchaser in California or if the property is shipped from California to a state where the taxpayer is not taxable or the purchaser is the U.S. government. For taxable years beginning on or after January 1, 2011, sales are also in California if any member of a combined reporting group is taxable in California, or if sales are shipped from California to a state where no member of the combined group is taxable.
Sales of other than tangible personal property are assigned to the California sales factor numerator as follows:
- Sales from services are in California to the extent that the purchaser of the services received the benefit of the services in California.
- Sales from intangible property are in California to the extent that the property is used in California. In the case of marketable securities, sales are in California if the customer is in California.
- Sales from the sale, lease, rental, or licensing of real property are in California if the real property is located in California.
- Sales from the rental, lease, or licensing of tangible personal property are in California if the property is located in California.
The webpage may be viewed at https://www.ftb.ca.gov/businesses/Sales_Factor.shtml.
Changes in Kentucky
Small Business Tax Credit:
Effective July 15, 2014, Kentucky has simplified the Small Business Tax Credit Program, which can be taken against the corporate or personal income taxes, and the limited liability entity tax. In order to be eligible for the small business tax credit, a business must be a small business operating for profit with . A 50 or fewer full-time employees. To be eligible for the credit, the small business must create at least one new job over its base employment and invest at least $5,000 or more in qualifying equipment or technology within six months. In order for the equipment to qualify, it must be tangible property that has an expected useful life of more than a year. The amount of credit must not exceed $3,500 per eligible position or $25,000 per applicant per fiscal year. The tax credit is equal to $1,000 per eligible position,
plus 50% of the qualified equipment cost basis.
Job Retention Act:
The Kentucky Job Retention Act program was only available to manufacturers of automobiles and automobile parts and supplies. However, effective 07/15/2014, the program has been extended to the companies involved in manufacturing of household appliances or household appliance parts or supplies.
District of Columbia Adopts Market-Based Sourcing and Single Sales Factor
Recent legislation in the District of Columbia enacted a single sales factor effective for tax years beginning after 2014. This is a change from the current three-factor, double-weighted sales apportionment formula currently in place. Additionally, the District of Columbia also moved to a market-based approach for the sourcing of sales.
More and more states are moving to a market-based approach for apportionment of service income, which requires that service income be apportioned based on where the benefit of the service is received, typically the end user of the services. States that have already adopted market-based apportionment for service income include: Alabama, California, Georgia, Illinois, Iowa, Maine, Maryland, Michigan, Minnesota, Ohio, Oklahoma, Utah, Wisconsin, Massachusetts (eff. 1/1/14), Nebraska (eff. 1/1/14), Pennsylvania (eff. 1/1/14), Arizona (optional eff. 1/1/14), and New York (eff. 1/1/15).
Should I be collecting sales tax in that state? What about income taxes in this state? Do I have liabilities that I’m not even aware of?
Now is the time… Somerset can help you clear your conscience and limit your exposure to state & local tax liabilities through voluntary disclosure.
Did you know that most states and localities have a voluntary disclosure program to encourage taxpayers with past due liabilities to come forward? You can use voluntary disclosure to settle many types of taxes including: income/franchise tax, business activity tax and sales & use taxes.
The primary benefits of voluntary disclosure include:
- Limited look-back periods – typically 3-5 years as opposed to an unlimited look-back period if no returns are filed
- Potential abatement of penalties (interest still applies in most cases)
- Closure – you can rest easy knowing that your past liabilities have been settled
If you believe you may have exposure to state & local tax liabilities, Somerset can help. Call one of our state & local tax advisors to discuss your options.