Assembly Bill 85 law changes for LLCs, LLPs, and LPs and the 15-day rule
During the 2020-21 legislative session, Assembly Bill 85 was enacted to make numerous changes to the California Revenue and Taxation Code. One of those changes was to eliminate the annual tax for Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), and Limited Partnerships (LPs), that organize, register, or file with the Secretary of State on or after January 1, 2021, and before January 1, 2024, for their first taxable year, subject to an appropriation by the legislature to FTB for the costs of administration.
California law generally imposes a minimum franchise tax of $800 on every corporation incorporated, qualified to transact business, or doing business in California. A corporation that incorporates or qualifies to do business in California is exempt from paying the minimum franchise tax in its first taxable year.
Business entities such as LLCs, LLPs, and LPs are subject to an $800 annual tax. However, before the passage of AB 85, these entities were not able to receive the same benefit of that tax exemption for an entity’s first taxable year. With AB 85 now being chaptered, the California Revenue and Taxation Code has been amended to extend the first year exemption to LLCs, LLPs, and LPs that organize, register, or file with the Secretary of State “on or after January 1, 2021, and before January 1, 2024.”
Because of the operative date specified in AB 85, the 15-day rule may impact whether an LLC, LP, or LLP is eligible for the exemption from the annual tax during its first taxable year. The 15-day rule is a set of provisions within the California law (R&TC Sections 17936, 17946, 17948.2, and 23114) that provide some relief to business entities (LPs, LLPs, LLCs, and corporations) from the general requirement to pay the annual/minimum tax.
A business entity is not subject to the $800 annual/minimum tax if the entity both:
- Did not conduct business in the state during the taxable year
- The taxable year was 15 days or less
For example, if an entity filing on a calendar year basis is formed on December 17 or after and does no business for the remainder of the year, then it may not have to file a tax return and pay the $800 annual/minimum tax for that short tax year. Since an entity that meets the 15-day rule is not required to file a tax return, this time period is not considered the first tax year. The following tax year will be considered the first taxable year.
However, AB 85 only provides an exemption from the annual tax for LLCs, LPs and LLPs that organize, register, or file with the Secretary of State on or after January 1, 2021, and before January 1, 2024. Therefore, entities taking advantage of the 15-day rule by registering on December 17, 2020, and on or before December 31, 2020, are not eligible for the first year tax exemption, regardless of whether the 15-day rule would apply for that short period. Only LLCs, LLPs, or LPs that organize, register, or file after January 1, 2021, are eligible for the first taxable year annual tax exemption.
