Planning on filing a final year California entity tax return? If so, taxpayers should be aware of California’s dissolution procedures to ensure the California Franchise Tax Board (FTB) does not assess unnecessary minimum annual taxes.
The FTB will not assess the minimum franchise tax if:
- The entity files a timely final tax return on or before the extended due date for the preceding taxable year;
- The entity does not do business in California after the end of that preceding taxable year; and
- The entity files a Certificate of Dissolution, Certificate of Surrender, or Certificate of Cancellation with the California Secretary of State (SOS) before the end of the 12-month period beginning with the date the final return was filed.
This can be illustrated as follows:
X Inc., a calendar-year corporation, ceased business on November 12, 2012. Provided it does no business after December 31, 2012, X, Inc. has 12 months from the date it files its timely (including extensions) 2012 tax return to file and have its dissolution documents accepted by the California SOS. If the dissolution documents are not filed within the required time frame, X, Inc. may continue to be subject to the minimum annual tax, even though no business is conducted and a final year tax return was filed.
The dissolution paperwork may be filed either before or after the tax return is prepared and filed. However, the dissolution documents may not be filed until the entity has ceased operation. The entity’s tax year ends with the date the California SOS stamps the submitted dissolution documents. Therefore, if the entity is dissolved prior to the end of the taxable year, a short period return must be filed with the FTB.
An example of a short year is as follows:
Y, Inc., a calendar-year corporation, sells its assets and distributes cash to its shareholders on July 5, 2012. Y mails cancellation documents to the California SOS on July 25, 2012. Assuming the California SOS processes and stamps the documents on July 31, 2012, Y, Inc. will have a short year (January 1, 2012 – July 31, 2012) and the due date of the California return is October 15, 2012 (extended due date is May 15, 2013).
Alternatively, Y may file its final full-year return on or before October 15, 2012 and then file dissolution paperwork within 12 months of filing the timely final return.
For limited partnerships governed by the Uniform Limited Partnership Act of 2008, there may be additional filings. See the California SOS’s website for more information (www.sos.ca.gov).