Ask the Advocate
Does my Corporation Qualify for the First Year Minimum Tax Waiver?
As you know, each year any C or S corporation doing business in California must file a state tax return and pay the greater of the $800 minimum tax (Revenue and Taxation Code (R&TC) Section 23153), or the franchise tax (R&TC Section 23151). This is true even if the corporation is formed in a different state and has not qualified by registering with the California Secretary of State (SOS).
Most entrepreneurs know that for their corporation’s first tax year, the $800 minimum tax is waived and the smaller franchise tax, if any, is paid. This is only if their corporation qualified or incorporated with the SOS. This first-year relief is also available to Limited Liability Companies if they elect to be treated as either a C or S corporation.
However, what many entrepreneurs may not know is that when a corporation does not qualify by registering with the SOS, referred to as a non-qualified corporation, it is not eligible for the first year minimum tax waiver. This is often the case with corporations formed in a different state that are doing business in California.
For example, ABC Corporation formed in a different state, a foreign corporation, on November 1, 2010, began doing business in California in 2010, and had taxable income of $1,000 from this state. However, ABC Corporation did not register with the SOS until July 2011. Accordingly, for 2010 ABC Corporation is a nonqualified corporation and must file a California corporate return and pay the $800 minimum tax.
The good news is that a non-qualified corporation may still be able to receive first year relief. Back in 2002, we issued Archived Technical Advice Memorandum (TAM) 20020138 that states, in part:
“… [R&TC Section 23153(f)(1)] permits a nonqualified corporation the first year exemption of minimum franchise tax if… it commences doing business in California even though it thereafter qualifies with the Secretary of State within the SOL [statute of limitations].”
So, back to the example, after ABC Corporation registers with the SOS in July 2011, it may then file a claim for refund of $711.60 for its 2010 return. The refund amount is the difference between the $800 minimum franchise tax and the franchise tax of $88.40 ($1,000 x 8.84 percent). Since the claim would be filed within the statute of limitations, we would refund the $711.60 plus interest.
More good news is that this year we began allowing corporations to e-file the Form 100X Amended Corporation Franchise or Income Tax Return. For more information go to ftb.ca.gov and click on the Business tab.
Steve Sims, EA
Taxpayers’ Rights Advocate
Follow me on Twitter at twitter.com/FTBAdvocate.