By: Jason Schneider, CPA, Partner, Osborne Rincon CPAs
In general, the State of California presents some unique challenges when it comes to its tax code. In fact, non-conformity has become the norm when it comes to federal vs. California tax law. That being said, California did take an unusual step this year to help out taxpayers and business owners who have shut down and/or walked away from their businesses.
Because a business entity (C-corporation, S-corporation or LLC) is a function of the state in which it originates, the IRS has left the closing of these entities to be a state function. In order to fully end the lifecycle of a business in California, the final income tax return needs to be filed, assets and liabilities need to be dealt with and the dissolution documents need to be filed with the Secretary of State’s Office.
If these steps were not completed, the Franchise Tax Board (FTB) would continue to assess the annual $800 minimum tax along with penalties and interest until the business formally completed the dissolution process. In many cases, the business owners would assume their entity was closed down and would ignore or not pay the $800 minimum tax that accrued which would ultimately lead to thousands of dollars in taxes, penalties and interest piling up. On top of that, after a certain amount of time unpaid, the business would be suspended by the Secretary of State or FTB and would not be able to legally dissolve until that liability was cleared up.
Fortunately, as of January 1, 2019, California allows for the administrative dissolution of qualified corporations and LLCs that are not doing business in California and/or have been suspended by the FTB. As part of this process, taxpayers are no longer required to pay all back taxes in order to dissolve. Assembly Bill 2503 provides for either a voluntary or an involuntary administrative dissolution. To effectuate a voluntary dissolution, the entity must have ceased doing business in California, filed all necessary tax returns up until the time of cessation and not have any assets remaining in the business.
By allowing business entities to be completely shut down and administratively dissolved, California has eliminated the catch-22 which often existed where a business had no money, yet was required to pay significant taxes, penalties and interest to fully close the lifecycle of their business.
There are some particulars to this program which are too detailed to get into in this article, so if this situation pertains to you, we would be happy to assist you.
For more information call Osborne Rincon CPAs at 760-777-9805.