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Steve Sims, Taxpayers' Rights 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

 

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