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The state budget and your LLC

Posted: October 23, 2008 8:31 p.m.
Updated: December 25, 2008 5:00 a.m.

As we all should be aware by now, the state of California finally has a budget for the 2008-2009 fiscal year. But have you had a chance to get into the details of how the state was able to raise revenues to cover its persistent budget deficit?

One such revenue raiser was an acceleration of the annual fees payable by limited liability companies (LLCs) doing business in the state.

Under the Revenue and Taxation Code (R&T) section 17941, all LLCs operating in California are subject to an annual minimum tax of $800 for the privilege of doing business within the state.

The minimum tax is payable by the 15th day of the fourth month of each LLC's taxable year (April 15 for calendar year LLCs).

Further, under R&T section 17942, LLCs with total income derived from or attributable to the State of $250,000 or more are subject to an additional annual fee based on their total income.

Total income is a gross income, not net income, amount; so an LLC does not have to make a profit in order to be liable for the additional annual fee.

The amount of the additional annual fee is graduated: $900 for total income of $250,000 to $499,999; $2,500 for total income of $500,000 to $999,999; $6,000 for total income of $1,000,000 to $4,999,999; and $11,790 for total income of $5,000,000 or more.

Prior to the passage of the budget, the additional annual fee was required to be paid by the due date of the LLC's annual tax return - the 15th day of the fourth month after the close of the LLC's taxable year (again, April 15 for calendar year LLCs).

In order to implement the LLC annual fee revenue-raiser, Assembly Bill ABX3 29 has been introduced to require that LLCs make an estimated payment of the additional annual fee amount by the 15th day of the sixth month of the LLC's current taxable year (June 15 for calendar year LLCs).

In addition, the bill establishes a 10 percent penalty for underpayment of the estimated fee.

The result of adding this estimated payment requirement is to advance payment of the fees that would otherwise be due to the State by 10 months.

This change is merely a short term revenue enhancement to the State as, within a taxable year or so, all LLCs will be paying on the accelerated basis and the Legislature will have to look for new revenue sources (or budget reductions).

In this transition, LLCs will have a taxable year of "double" additional annual fees - the April 15 payment for the prior taxable year plus the June 15 estimated payment for the current taxable year.

LLCs are advised to make sure that their budgets and tax payment calendars for the coming year take into account the double payment.

Chris S. Jacobsen is a partner with Poole & Shaffery, LLP, a full service business, corporate and employment law firm. His column reflects his own view, and not necessarily that of The Signal. "It's The Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association.


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