A California LLC can now legally “avoid” the $800 Annual Franchise Tax (1st year)
California Assembly Bill 85 was signed into law by the governor on June 29th, 2020.
While California Assembly Bill 85 affects multiple aspects of the state budget, we’re focusing on how it affects people forming an LLC in California.
There is now some financial relief for the 1st year for people forming an LLC in California.
California LLCs before Assembly Bill 85:
California LLCs paid an $800 fee within 2-3 months of being approved.
Then they paid that fee again April 15th every year.
LLCs formed later in the year (October – December) ended up with back-to-back payments, totaling $1,600.
California LLCs after Assembly Bill 85:
California LLCs don’t pay an $800 fee for their 1st year (if the LLC is formed after January 1st, 2021).
This completely eliminates the back-to-back $1,600 payment issue!
And it moves an LLC’s first $800 payment 12-16 months after the LLC is approved.
When is my LLC’s franchise tax due?
If your California LLC goes into existence on or after January 1st, 2021 (but before December 31st, 2023), there is no $800 payment due the 1st year.
The first $800 payment is due in the LLC’s 2nd year.
Let’s look at a few examples below.
California LLC franchise tax due dates (after Assembly Bill 85):
|LLC approval date||No payment this year||First $800 payment|
|Any day in 2021||2021||Due April 15th, 2022|
|Any day in 2022||2022||Due April 15th, 2023|
|Any day in 2023||2023||Due April 15th, 2024|
|Any date in 2024||2024||Due 2-3 months after approval|
Said another way:
Your first $800 payment is due the year following the year your LLC is approved.
Does my California LLC need to pay franchise tax in the 2nd year?
Yes, it does. Your California LLC needs to pay the $800 franchise tax payment starting in its 2nd year, and continuing onward.
The California LLC franchise tax exemption from Assembly Bill 85 only covers the LLC’s 1st year.
Your California LLC needs to pay the $800 franchise tax payment in its 2nd year and for all years afterward.
Does my California LLC need to file Form 3522 (Limited Liability Company Tax Voucher) in the 1st year?
No, since your California LLC doesn’t need to pay the $800 franchise tax for its 1st year, you don’t need to file Form 3522.
Form 3522 will need to be filed in the 2nd year.
For instructions on filing Form 3522, please see California LLC Annual Franchise Tax.
Does my California LLC need to file Form 3536 (Estimated Fee for LLCs) in the 1st year?
Yes, your California LLC needs to file Form 3536 and pay an Estimated Fee if it will make more than $250,000 in total revenue.
If your LLC will not earn that much in total revenue, then you don’t need to file Form 3536 (in the LLC’s 1st year or any year.)
What is the Estimated Fee for California LLCs?
It’s called an “Estimated” Fee because you will need to forecast your LLC’s total revenue. If your LLC will come close (or exceed) $250,000 in total revenue, then you should file Form 3536 and pay the Estimated Fee.
The Estimated Fee begins at $900 and increases depending on your LLC’s estimated income. For more information and instructions, please see California LLC Annual Franchise Tax.
What’s the goal of Assembly Bill 85 for business owners?
The overall goal of Assembly Bill 85 is to bring in additional tax revenue to the state.
Section 24(b)(1) of Assembly Bill 85 states:
“The goal of this act is to help and reduce costs for first-year California small businesses.
Existing law imposes an Annual Minimum Franchise Tax of $800 on every Corporation, and an Annual Tax of $800 on every Limited Liability Company (LLC), Limited Partnership (LP), and Limited Liability Partnership (LLP), which may be difficult to afford for first-year businesses.
As such, these taxes may stifle economic growth and job creation and may inhibit the formation of many small businesses.”
It may seem counterintuitive to remove fees in order to bring more tax revenue to the state. However, the California Legislature hopes that by removing the $800 Annual Tax on first-year businesses, this will bring in more tax revenue in the future.
California Franchise Tax Board Contact Info
If you have any questions, you can contact the California Franchise Tax Board (FTB) at 800-852-5711.
Their hours are Monday through Friday from 8am to 5pm, Pacific Time.
- While hold times can sometimes be long, the FTB has an option to hold your place in line and call you back.
- You can check how long the wait times are: CA FTB: wait times.
- There is also a live chat option: CA FTB: live chat.