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Tiered Limited Liability Companies (LLCs owning LLCs) – Fee or No Fee?

When it comes to tiered LLCs, each entity will have an annual tax. But, when it comes time to determine whether or not the LLC will have to pay a fee, the process is not always clear cut.

California law[1] imposes an annual fee on every LLC that has “Total California Income” of $250,000 or more. “Total Income” for this purpose means gross income, plus the cost of goods sold, paid, or incurred in connection with the trade or business of the taxpayer attributable to California; and specifically excludes all allocations, distributions, or gains from another LLC that was already subject to the LLC fee.

So when you are looking to determine how the LLC’s “Total California Income” is, don’t include gross receipts received from another LLC that were included in that LLC’s calculation of the fee. If the income has already been reported by another LLC, do not enter the amounts on the Schedule IW (LLC Income Worksheet).

The Schedule IW is now Side 6 of the California Form 568 and it must always be included with the Form 568, even if the LLC does not have income derived from or attributable to California. If the LLC is wholly within California, the total income amount is assigned to California and is entered beginning with line 1a. If a single member LLC (SMLLC) does not meet the $3 million criteria[2] for filing Schedule B (Form 568) and Schedule K (Form 568), the SMLLC is still required to complete Schedule IW. Disregarded entities that do not meet the filing requirements to complete Schedule B or Schedule K should prepare Schedule IW by entering the California amounts attributable to the disregarded entity from the member’s federal Schedule B, C, E, F (Form 1040), or additional schedules associated with other activities.

For more information, get instructions on Page 13 of the 2012 Form 568, Limited Liability Company Tax Booklet, on how to complete Schedule IW.

Example 1:

LLC A has $1,200,000 of total California sourced income during 2012 taxable year. LLC B has 50 percent member interest in LLC A. LLC B has $900,000 of total California sourced income during 2012. LLC B’s income includes $600,000 ($1,200,000 x 50% member interest) from LLC A ($1.2 million x 50 percent member interest). For taxable year 2012, LLC B excludes $600,000 of total income because it was already used to calculate the fee of the LLC A.

The filing requirements are:

Entity 2012 Form Annual Tax Total Income LLC Fee
LLC A 568 $800 $1,200,000 $6,000
LLC B 568 $800 $300,000 ($900,000-$¬600,000) $900

Example 2:

LLC 1 owns LLC 2 and LLC 3. LLC 1 has $1,400,000 of total California sourced income during the 2012 taxable year. LLC 2 has $1,000,000 and LLC 3 has $300,000 of total California sourced income during the 2012 taxable year. Since LLC 1 has 100 percent member interest in LLC 2 and LLC 3. LLC 1 has income that includes LLC 2 and LLC 3’s income totaling $1,300,000. For taxable year 2012, LLC 1 excludes $1,300,000 of total income when determining its total California sourced income for purposes of calculating its fee because this income was already used to calculate the fees of the LLC 2 and LLC 3. LLC 1 will only pay a fee if LLC 1 has total California sourced income of $250,000 or more.

The filing requirements are:

Entity 2012 Form Annual Tax Total Income LLC Fee
LLC 1 568 $800 $100,000 [$1,400,000-($1,000,000+$300,000)] $0
LLC 2 568 $800 $1,000,000 $6,000
LLC 3 568 $800 $300,000 $900

[1]R&TC section 17942

[2]Either 1) the income or loss amount reported on Schedule B, line 1 or line 3 through line 11, is $3,000,000 or more or 2) the “Total distributive income/payment items,” Schedule K, line 21a, is greater than or equal to $3,000,000 OR less than or equal to $-3,000,000.

 

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