ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FTB CORPORATION/LLC MINIMUM TAX – WHAT YOU NEED TO KNOW
By Robert S. Schriebman
Corporations and LLCs doing business in California must pay a minimum franchise tax each year, except for the first year of operation. This minimum tax is not measured by the amount of income earned by the entity. Even dormant businesses must pay a minimum tax of $800 per year for the privilege of doing business in California (R&TC § 23151). Every corporation or LLC that is incorporated under the laws of this State, is subject to this minimum franchise tax, from the earlier of the date of its incorporation or commencing to do business in California, until the entity is legally dissolved (R&TC § 23153 (a), (b), (1)). After January 1, 2000 no minimum tax is required during the entity’s first taxable year.
As clear as the above rules seem to be, questions do arise. Two of the most common questions deal with suspended companies and individual personal liability for the entity’s unpaid minimum annual tax.
Are Minimum Payments Required for Suspended Corporations and LLCs?
The recent case of DRH Construction Group deals with this issue. While the case was decided in November 2020, it was released by the OTA at the end of February 2021 (2021-OTA-029). When a corporation or LLC fails to pay the annual minimum tax and/or fails to file a tax return with the FTB, that entity may be suspended. This means that the entity cannot legally perform any function. It cannot sign contracts, and it cannot challenge tax assessments. Must a suspended entity still pay future minimum franchise taxes? In DRH the taxpayer argued that it was not required to comply with the law after it had been suspended. Judge T. Leung stated "Moreover, although appellant argues that its suspension should also suspend the annual minimum tax and associated penalties and interest, the law requires all such amounts be imposed until the corporation is dissolved; the record contains no evidence of appellant’s dissolution."
When the suspended entity wants to get right with the FTB, it must fille all delinquent returns even if it was not active and pay all minimum tax arrearages plus penalties and interest.
Is There Individual Personal Exposure for Unpaid Entity Level Minimum Tax?
I have been practicing law for over 50 years. Periodically the FTB issues an announcement that individual shareholders and officers can be held personally liable for all unpaid minimum taxes, penalties and interest. I have personally only observed one instance where this has happened. A great majority of suspended corporations or LLCs are never visited upon their owners. It appears to be a rule that is rarely enforced.
The EDD on the other hand often goes after shareholders and officers pursuant to CUIC § 1735. Now that’s a threat where the EDD really means business!
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.
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