A Simple Guide to California LLC Form 568
California LLC Form 568 is a vital tax document for limited liability companies (LLCs) operating in the state. It is used to report an LLC’s income, deductions, gains, losses, and credits, thereby determining not only the tax that the LLC must pay but also how that tax is allocated among its members. Its purpose is to ensure compliance with California tax laws and regulations and to calculate any franchise or income tax that may be due.
LLCs that are organized in California or that are "doing business" in California must file Form 568 annually. "Doing business" in California generally includes factors such as having sales , property, or payroll in California in its activities, actively engaging in any transaction for financial gain or profit, or being a part of a unitary group that has business income sourced to California. For most LLCs organized outside of California, a carefully drafted operating agreement limits activity in California and may require that the members find the extent to which the LLC is "doing business" in California and whether the filing of Form 568 is even required.
Who is Required to File Form 568?
Not every LLC in California is required to file California LLC Form 568 with the California Franchise Tax Board. Only those who have not been exempted or waived are on the hook. That exemption is granted to LLCs classified for tax purposes as "C" corporations, LLCs that on or after January 1, 2013 make a certified "Qualified Subchapter S Subsidiary (QSSS) election", those that are in dissolution or bankruptcy proceedings during the taxable year, and LLCs whose only income $250 or less is from foreign sources, which are subject to tax in other states. Also exempted are LLCs owned by entities that have elected to be taxed as corporations or they are owned solely by one or more estates or trusts.
A reason that many California LLCs may not file California LLC Form 568 is that their annual gross receipts are under the income limit for form filing which includes the gross income of all the LLC’s members. The filing threshold is $250,000 or less if the LLC’s total income when added to the pro rata share of income of all LLC members does not exceed this threshold.
Filing is also required from LLCs with gross receipts of $250,000 or more regardless of where they were generated. Member-managed or manager-managed LLCs are treated the same for California tax purposes. Most LLCs formed in California that are not exempt will have to file a Form 568.
Step by Step Form Filing Instructions
Completing Part I: Identifying Information and Income
- (1) Name and App. number. Enter the name and number of the LLC as shown in item (1) of the LLC’s Limited Liability Company Return of Income (Form 568).
- (2) Year. Enter the year the LLC business is ending, using four digits.
- (3) Final return. Check the "Final return" box only if the LLC will no longer be operating its business or meeting the conditions for doing business as an LLC in California.
- (4) Mark applicable boxes. Check item (C) for a disregarded LLCs that has foreign income, credits, or deductions.
Part II: Adding Est. Fee and Penalties/Interest
(1) Annual tax and figure used for apportionment. The annual tax is $800. The annual tax is treated as a continuance fee, not an element of the income taxes (R&TC Sections 17941 & 17948). An LLC is always subject to the annual tax for each tax year it is in existence, regardless of whether it does business in California, the amount of its income, or whether it has income at all. However, an LLC that did not conduct business in California, had no gross income, and had total income from all sources of less than $250,000 may not be subject to the annual franchise tax or continuing fee; see R&TC Sections 17941 and 17948.
The program uses the amount in Part I, line 2e as the "figure used for apportionment" for both foreign and domestic LLCs.
(2) Penalty code and amount. Enter the penalty code from the instructions below and corresponding penalty, if applicable.
(3) Interest code and amount. Enter the interest code from the instructions below and corresponding interest, if applicable.
Part III: Tax Computation
(1) Domestic and foreign LLCs who had gross income of $250,000 or more, enter the amount from Part I, line 1, column A.
(2)a Domestic and foreign LLCs, enter $800.
b. Domestic LLCs without income imputed from partnerships or limited liability companies. If the LLC was disqualified during any portion of the tax year and had income imputed from partnerships or limited liability companies, enter $800.
c. Domestic LLCs with income imputed from partnerships or limited liability companies. If the LLC was disqualified during any portion of the tax year and had income imputed from partnerships or limited liability companies, enter $800.
d. Domestic like-kind exchange filers. For returns originally filed through 2018, enter the amount from Part 1, line 2e on Form 565 or Form 568.
e. Disregarded LLCs. If the LLC has only disregarded single member(s) as shown on Schedule B of Form 568 and the amounts on Part II, lines 1 and 2 are at least zero, enter zero.
(3) Total fees owed. Add Part II, line 2x, to line 3 for domestic LLCs or 2a, minus 2b, for foreign LLCs. Enter the amount on the lines indicated.
(4) LLC return fee credit carryover. Use Credit Code L or N to the right of line 4 and enter the amount of foreign or domestic LLC Return fees carried over from prior years. For LLCs filing this form for tax year 2012 and subsequent years, the unused credits expire after 15 years. See instructions on how carryover credits can be used to offset the LLC tax or fee.
Common Filing Pitfalls to Avoid
Despite the detailed guidelines, there remains a notable number of inaccuracies on Form 568. Careful review and attention to detail in filling out the form can help you avoid these common pitfalls:
– Failing to answer the questions at the beginning of the form clearly and completely. It’s important to select (or not select, as appropriate), the check boxes and provide all requested information, so the Franchise Tax Board (FTB) has a complete picture of your LLC. The FTB compares information from the tax returns of the LLCs and its members to identify inconsistencies and contact you for clarification.
– Completing only the required fields. While your LLC may not have been active during the taxable year , you’ll still need to file a return. Marking and completing the fields for inactive LLCs helps the FTB understand that the return is complete and its only purpose is to indicate a lack of activity.
– Providing incorrect or inadequate contact information for the LLC. If the FTB has questions regarding the return, the filing will be subject to penalties and interest if it does not receive clarification from the LLC in a timely manner.
Filing Deadlines and Late Fees
Filing California LLC Form 568 on time is not just a good business practice; it’s the law. Consistent with all tax-related documents, California LLCs must file this form by the mandated deadlines, which are generally aligned with personal income tax filing deadlines. One notable exception is for new LLCs, which are required to submit Form 568 by the 15th day of the month following the close of the LLC’s first taxable year.
For a single-member LLC that is disregarded for tax purposes, a return must be filed if the LLC received California source income or has a total income of $250,000 or more in the year. However, California does not recognize federal single-member LLC rules — this means that if an LLC elects S-Corp classification with the Internal Revenue Service, the California Form 568 filing deadline is still 15th day of the fourth month of the taxable year.
Form 568 is due on the 15th day of the fourth month after the end of the LLC’s taxable year. For example, if the tax year is January-December, the form is due on April 15. If it’s a calendar year filing (January-December), the return will be due on April 15. An extension will result in the Form 568 being due on Oct. 15.
A timely filed Form 568 is considered a "return" for statute of limitations purposes and may be adjusted by adjustments involving noncompliance with the state’s Franchise Tax Board, or by audit adjustments. If a return is not filed, the Franchise Tax Board have up to bench mark date to impose penalties, assessments and possible criminal misconduct action.
Where to Get Help with Filing Form 568
Filing a Form 568 correctly is only part of successfully filing your taxes as an LLC in California. There are a number of resources provided for business owners who may need advice or further assistance.
The official California Secretary of State website provides a number of resources and guides for business owners. The Limited Liability Company Manual for the California Secretary of State is available to help business owners understand filing obligations and legal changes that may impact their taxes. Publication 1060, the Limited Liability Company (LLC) Filing Guidelines, gives information about choosing a business name and statement of purpose, in addition to how to file articles of organization.
Professional tax advice is also available from a number of sources . While not all LLCs are legally required to retain a tax advisor, it is often advisable, particularly if the business has multiple members or is highly profitable. Some business owners find retaining a part-time CFO online provides the expertise they need in preparing a tax return and planning for the next quarter or year. Tax advisors with experience in LLCs or small businesses can significantly reduce the headache surrounding tax season.
Business owners have other options, such as participating in online forums. These forums allow business owners to ask advice from others who own businesses in their state or industry. Other business owners may have insight into how to fill out a Form 568 correctly, and some may even be able to provide professional services.
