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Our May Newsletter highlights the LLC, LP and LLP annual Tax Exemption Expiring in 2024 in California.

LLC, LP and LLP Annual Tax Exemption Expiring in 2024
The temporary exemption for the $800 annual tax available to new limited partnerships (LPs), limited liability companies (LLCs), and limited liability partnerships (LLPs) is scheduled to expire this year. (R&TC §§17935(f), 17941(g), 17948(e)) As the law is currently written, the exemption only applies to an LLC’s, LP’s, and LLP’s first year of business if the entity registers with the Secretary of State’s office on or after January 1, 2021, and before January 1, 2024.

This means that if legislation is not enacted this year to reinstate the exemption, the exemption will no longer be available for new LLCs, LPs, and LLPs doing business in California starting with the 2024 tax year. However, the exemption from the $800 minimum franchise tax for corporations will remain in place. (R&TC §23153(f))

Doing Business Requirement
The tax only applies to entities doing business in California. An out-of-state entity that is filing a California return only to report California-source income and is not doing business in California, is not registered with the SOS, and is not organized in California is not subject to the annual tax. (R&TC §§17935, 17941, 17948; Form 565 Instructions) An example would be an entity that is a limited partner of another partnership whose only California-source income is California-source income passed through from that partnership, provided the income does not exceed the R&TC §23101(b) economic nexus thresholds.

Paying the Annual Tax
The $800 annual tax for LPs and LLPs is due by the original due date of FTB Form 565, Partnership Return of Income (March 15 for calendar-year entities).

In contrast, LLCs must pre-pay the annual tax by the 15th day of the fourth month of the LLC’s current taxable year (in other words, LLCs must pay the tax as a first-quarter estimate). For the 2024 taxable year, a full-year calendar-year LLC must have made the $800 payment by April 15, 2024. For new entities, the LLC must make the payment by the 15th day of their fourth month of organization.

Example of Annual Tax for New Entity
Looloo, LLC forms in March of 2024. Looloo must pay its $800 annual tax by June 15, 2024.

Interplay with LLC Fee
Like the LLC annual tax, the LLC gross receipts fee is also pre-paid. Except for new entities, the fee is due by the 15th day of the sixth month of the current taxable year (June 15 for calendar-year taxpayers). LLCs must use Form FTB 3536, Estimated Fee for LLCs, to remit the estimated fee.

The estimated fee must be at least 100% of the current taxable year fee. If the taxpayer’s payment is late or less than the amount owed, then the FTB will assess an underpayment penalty. (R&TC§17942(d))

The underpayment penalty is 10% of the difference between the fee paid and the fee owed. However, there is a prior-year exception if the timely paid estimated fee is equal to or greater than the prior-year’s fee. The prior-year exception applies to a new LLC, so no estimate is due for the first year.

LLC Payment/Filing Checklist

For LLCs, there are three (3) important dates to keep in mind. The list below is for calendar-year taxpayers:

• April 15 of current year: Pre-pay the $800 annual tax;

• June 15 of current year: Pre-pay the LLC gross receipts fee; and

• March 15 of following year: File LLC return (CA FTB 568) and pay any remaining balance of LLC fee or claim refund for overpaid fee

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