Ask the Advocate
When Does an Out-of-State California Business or Individual Need to File a California Income Tax Return?
Sole proprietors and business entities, not based in California, still may be subject to California taxation if they are doing business in California or have income from California sources.
California Revenue and Taxation Code (R&TC) Section 23101 defines "doing business" as actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. Unfortunately, this is often a facts and circumstance test. While we are able to discuss the facts and circumstances to consider in determining if an entity is doing business in California, taxpayers must ultimately decide if they are doing business in California.
R&TC Section 23101(b) does provide some “bright-line tests” for out-of-state business entities based on sales, property, and compensation. For tax years beginning on or after January 1, 2011, an out-of-state business entity that is not doing business under R&TC Section 23101(a) may be considered doing business in California under R&TC Section 23101(b) if it has sales, property, or payroll compensation in California in excess of “bright-line” threshold amounts. Sales, property, and compensation of the taxpayer include the taxpayer's pro rata or distributive share from pass-through entities.
For those unique circumstances where a taxpayer is unsure whether its activities constitute "doing business" in California under the general rule of 23101(a), the FTB will accept requests for written advice on that issue, but will continue to decline to rule on whether the specific factual threshold tests of R&TC Section 23101(b), have been met. See FTB Notice 2011-6.
Individuals, as well as sole proprietors and business entities may also need to file a California income tax return to report any income from California sources. The most common California income sources are:
- Gain from sale of real estate located in California.
- Income received through ownership of a partnership, S corporation, or limited liability company (LLC) that is doing business in California.
It is also common for nonresident individuals to have California source income from wages and salaries earned for services they perform while in California. FTB Publication 1031, Guidelines for Determining Resident Status, provides more information.
California source income received through ownership of a partnership, S corporation or LLC doing business in California, is identified on the appropriate California Schedule K-1 issued by the entity.
For information about how non-California based business entities should report California source income received though ownership in another business, please see the instructions for the applicable booklet for the out-of-state entity and Schedule R, Apportionment and Allocation of Income available online at ftb.ca.gov.
Out-of-state sole proprietors and business entities are doing business in California or have income from California sources would need to file one of the following California income tax returns:
- Sole Proprietors file using California Long Form 540NR and provide a copy of Federal 1040 Return, including Schedule C.
- Partnerships, limited partnerships, and limited liability partnerships file using California Form 565.
- Corporations file using either:
- LLCs file using California Form 568.
- Exception: An out-of-state Limited Liability Company that only has California source income, but has not registered with the SOS and is not doing business in California files California Form 565.
Certain nonresident individual owners of partnerships, S corporations, or LLCs may elect to file a group nonresident return using Long Form 540NR. For more information, get FTB Publication 1067, Guidelines for Filing a Group Form 540NR online at ftb.ca.gov.
Individuals who do not live in California need to file a California Nonresident Income Tax Return when their worldwide total income or adjusted income exceeds limitations specific to their filing status. See Form 540NR Booklet for more information.
Partnerships, S corporations, and LLCs that are doing business in California are required to withhold income tax on certain payments to nonresident owners. To receive a refund of the withheld taxes, the nonresident owner must file a California income tax return to claim the refund even if they are not otherwise required to file a California income tax return.
Also, there may be filing requirements to for other California taxing agencies that have sales or employees located in California. Go to the BOE website at boe.ca.gov for sales and use taxes, and the Employment Development Department’s website, edd.ca.gov for employment taxes.
Steve Sims, EA
Taxpayers’ Rights Advocate
Follow me on Twitter at twitter.com/FTBAdvocate.