Plan Carefully When Incorporating At The End Of The Year

Waiting a few days to incorporate your California business or form a California LLC can save you an additional $800.

A taxpayer who filed their articles of incorporation with the Secretary of State (SOS) on December 16, 2016, did not qualify for the 15 days or fewer exception to the $800 minimum franchise tax.1 This case serves as an excellent reminder for people considering forming new businesses. If they file with the SOS more than 15 days before the end of the year, they will also use their first-year-free exemption in that same year.

The taxpayer in this case mistakenly believed that because their articles were not processed until December 22, they were not required to file a return for 2016, and that they still qualified for the first-year-free rule for 2017. Unfortunately, because the entity’s incorporation papers were received by the SOS office more than 15 days before the end of the year, the papers were considered “filed” on that date. Therefore, the taxpayer was required to file a 2016 return and used up their “first year” $800 minimum tax exemption in 2016, rather than 2017.

First-year-free and 15-day rules

Businesses that incorporate within 15 days of the end of their annual accounting period may disregard that taxable year when determining their eligibility for the first-year minimum franchise tax exemption if they do no business in that taxable year.2

This means that a corporation that qualifies for forgiveness of the $800 minimum franchise tax under R&TC §23114 may use the first-year-free rule for the next year.3

Taxpayers that qualify for the 15-day exemption are also not required to file a return for that year.

One day cost them

If the taxpayer in this case had waited until December 17 to file with the SOS, they would not have been required to file a 2016 return, and they could have used their first-year-free exemption for 2017.

The taxpayer argued that the SOS took six days to send the articles of incorporation back to them, and they did not actually conduct any business in 2016. However, the law clearly states that the filing date is the date the documents are filed with the SOS, not the date the approved articles are received by the taxpayer.4 The SOS confirmed that the date of filing endorsed by the taxpayers on the articles of incorporation was December 16, and a future filing date was not requested by the taxpayers.

The taxpayer further argued that there are many steps that must be followed for a business to open, and due to processing times at the SOS and other agencies, even with filing on December 16 they were unable to conduct any business in 2016. The OTA stated that they understood the argument and the many steps involved in starting a new business, but there are no exceptions to the 15-day rule.

Could have/should have

One option the taxpayers could have used to avoid falling into this all too common trap is to request that the document be treated as “filed” at a future date.5

The SOS has created a new online portal for filing the articles of incorporation for general stock corporations that specifically provides a box for companies to check to specify a future filing date.

1 Appeal of A Girl’s Empire, 2020-OTA-259
2 R&TC §23114
3 R&TC §23153
4 Corp. Code §101(a)
5 Corp. Code §110(a)

About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.

Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:

  • Tax Planning, Tax Debt Resolution and Tax Litigation
  • Business & Corporate Law & Planning
  • Estate Planning & Administration
  • Real Property Law & Planning
  • Asset Protection Planning

As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.

Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.

Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction).

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