I set up a California LLC but I have not ever conducted any business in the LLC. Is there any relief available to me in terms of closing my account with the Franchise Tax Board and the taxes that are assessed?
Effective January 1, 2019, AB 2503 was passed and this bill provides relief to taxpayers who:
- Set up a California LLC or corporation but never did any business; or
- Walked away from a failed California LLC or corporation but never formally dissolved or cancelled with the Secretary of State's office.
For clients who were in one of these situations, usually they were completely unaware that the entities continued to be liable for the $800 annual/minimum tax, penalties, and interest until they formally dissolve or cancel with the Secretary of State. This created a catch-22 for these taxpayers — they didn't have the money to pay the outstanding tax liabilities, but they couldn't formally dissolve until all prior tax returns had been filed and the taxes paid.
With the passage of AB 2503, taxpayers may apply for administrative dissolution. However, in order to apply for such a dissolution the taxpayer must have been compliant in filing and paying taxes during the years that business was conducted.
Once an entity is dissolved, all outstanding liabilities for the $800 minimum/annual tax and related penalties and interest will be abated.
Taxpayers who have any remaining assets in the business are not eligible for administrative dissolution.
I am domiciled in California but I have been employed outside of California. Am I considered a California resident or a California nonresident for tax purposes?
There is a special rule for certain individuals in this situation and that rule allows such taxpayers to be considered California nonresidents for tax purposes.
Under what's known as the "546-day rule," a taxpayer is a nonresident if that taxpayer:
- Is outside of California for at least 546 consecutive days under a written employment-related contract (a verbal contract won't count);
- Spends no more than 45 days in California during the taxable year; and
- Has less than $200,000 in intangible income in taxable years in which the employment-related contract is in effect. This test applies to the income of each spouse separately.
The 45-day period includes time spent in California whether it's for personal or business purposes.
A spouse is also a nonresident if they're accompanying the taxpayer who meets the test, and the spouse also has to meet the 45-day rule.
If the conditions of the 546-day rule are met, then the taxpayer is still domiciled in California but they're a nonresident.
It is my understanding that, effective for the 2018 tax year, many changes have been made to the federal income liability calculation? Has California conformed to these changes?
For the most part, California has not yet conformed to the federal changes. As a result, there are a number of deductions that you may still claim for federal income tax purposes:
- Moving expense reimbursements are still excludable fringe benefits.
- Transportation fringe benefits are excludable for California purposes, and California doesn't conform to the 50% limitation on entertainment expenses.
- Unreimbursed employee business expenses can be deducted for California purposes.
- California allows a mortgage interest deduction for acquisition debt of $1 million and equity debt of $100,000 (not allowed for AMT) for a maximum of $1.1 million.
- California does allow deductions for state and local real and personal property taxes, and does not conform to the $10,000 limitation.
- And taxpayers can still deduct tax prep fees on their California returns, as well as various miscellaneous itemized deductions like union dues, uniforms, and safety equipment, hobby expenses, expenses related to nonbusiness income, and attorney fees.
- For federal purposes, §529 account funds can be used for K-12 tuition costs, but that's not the case for California.