CA 99-0584 and California LLC Tax Classification

California’s Franchise Tax Board (FTB) released Notice 99-9 to declare its policy on the tax classification of Limited Liability Companies (LLCs). This notice aligned California’s state-level tax treatment of LLCs with existing federal regulations. The guidance clarified that an LLC’s federal tax classification determines its classification for California franchise and income tax purposes.

Federal “Check-the-Box” Regulations Context

The federal tax system provides default classifications for LLCs through “check-the-box” regulations. The Internal Revenue Service (IRS) automatically treats a domestic LLC with a single owner as a “disregarded entity.” This means the LLC is not seen as separate from its owner for income tax purposes, and its financial activity is reported as if it were a sole proprietorship.

For an LLC with two or more members, the default federal classification is a partnership, where income and deductions are passed through to its members. While these are the default statuses, the regulations also permit an LLC to elect to be taxed as a corporation by filing Form 8832, Entity Classification Election, with the IRS.

California’s Conforming Position in Notice 99-9

FTB Notice 99-9 established that California automatically adopts the federal entity classification for any LLC. This decision simplified tax compliance by creating consistency between federal and state systems. If an LLC is a disregarded entity or a partnership for federal purposes, it holds the same status for California tax purposes.

This conformity means a separate state-level election is not required, as the federal classification dictates the state treatment for income and franchise tax. This alignment ensures that the financial reporting for an LLC is streamlined across both jurisdictions.

Tax Filing Implications for California LLCs

Despite California’s conformity on income reporting, specific state-level filing obligations remain for all LLCs. Even though a single-member LLC is a disregarded entity and its income is reported on the owner’s personal return, the LLC itself must file Form 568, Limited Liability Company Return of Income. This form is an information return that also serves to calculate and pay the state’s annual LLC tax.

Every LLC registered or doing business in California is subject to an annual tax of $800, which is due regardless of whether the LLC is profitable or active. Furthermore, LLCs with total income of $250,000 or more are subject to an additional fee, calculated on a tiered basis. This fee must be estimated and paid during the tax year using FTB 3536, Estimated Fee for LLCs.