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California LLC Tax Help?

Past due on LLC Tax in California. Want to be elected as S corp. now. HELP?

  • I spoke to a person at Franchise Tax Board California about two weeks ago to find out whether I'm in a big trouble or not because I didn't pay the LLC tax for last year. I was relieved to hear that I will be perfectly okay as long as I pay the interest for being late which came up to about 10% There was a surprising bad news though that I was also late for this year's LLC tax as well! I had absolutely no idea that LLC taxes are due in advance at the beginning (well, April) of that year. Therefore, the total I had to send in came up to about $1750 with the interests ($800 + $800 + $80 + $70) Now, here comes my question. The rep told me that if I want to be elected as S corporation NOW which I've been wanting to do ever since I opened the company that I won't be obliged to pay the past due LLC taxes even though I didn't elect to be taxed as S corp when I opened the company. This sounded too good to be true if I understood it correctly. Did the rep know what he was talking about?

  • Answer:

    Electing treatment as an S corporation wouldn't help you for the $800 fee, unless last year was the first year you were in business. S corporations are also subject to an $800 minimum franchise tax, so you're going to pay the $800 either way. IF last year was your first year, then a successful S election would qualify you for the first year exemption. You might be able to get a late S election by filing Form 2553 "pursuant to" either Rev. Proc 2003-43 or 2004-48 (the About.com link below explains further). Your situation sounds like it would be a long shot, but have a local CPA or EA look into it if you're interested.

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One problem. You have 90 days from the beginning of the tax year to elect Sub-S status for that year. You can file an election now for 2008, too late for 2007, 2006, etc. I do not know if the Sub-S election retroactively changes any California tax. Off the top of my head, I think not. I think you need some professional advice before you jump to do anything. There are plusses and minuses to each way of filing and operating. These need to be explored before you do anything. Have you filed the necessary forms with IRS for 2005 &2006?

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The difference is that for LLCs the $800 tax is a fee for doing business in CA paid regardless of and inaddition to your tax liability, for an S-Corp the $800 is a minimum tax. If you owe $10 tax as a LLC your annual tax bill is $810. The same $10 tax liability for an S-Corp would result in a tax bill of $800. I don't think that the ellection would be retroactive but in the future you could save some money if you have an S-Corp.

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