Corporate Penalty for Failure to File Returns

Under California law, corporations in good standing with the California Secretary of State are allowed an automatic extension to file without the need to file a written request if its return is filed within the extension period. For corporations the automatic extension is seven-months. However, if a nonqualified, suspended, or forfeited corporation doing business in California does not file a tax return within 60 days after we send them a legal demand (i.e. FTB 4684 or FTB 4685, Demand for Tax Return) to file their corporate return, we will impose a $2,000 penalty per tax year (Revenue and Taxation Code (R&TC) Section 19135), in addition to other penalties, including the penalty for failure to file after notice and demand imposed pursuant to R&TC Section 19133.

With the amendments to R&TC Section 23101 that add specific conditions (threshold tests) for “doing business” in California for taxable years beginning on or after January 1, 2011, more out-of-state (foreign) corporations will have a California filing requirement.

As a result of this law change, a corporation is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if any of the following conditions are satisfied:

• The nonqualified corporation is commercially domiciled in California.

• Sales of the nonqualified corporation in California, including sales by the corporation’s agents, independent contractors, combined with any pro rata or distributive share of sales from pass-through entities exceed $500,000. California sales of $500,000 or less will also cause the nonqualified corporation to be considered to be doing business if they exceed 25 percent of the nonqualified corporation’s total sales.

• The nonqualified corporation has real and tangible personal property, combined with any pro rata or distributive share from pass-through entities, in California over $50,000. California property of $50,000 or less will constitute “doing business” or if it exceeds 25 percent of the corporation’s total real and tangible personal property.

• The nonqualified corporation paid California compensation, combined with any pro rata or distributive share of compensation from pass-through entities, over $50,000 (or over 25 percent of the total compensation).

When you consider whether or not a business entity has California sales for purposes of the above threshold test be sure to apply the new sales factor rules, including the Market-Based Rules for Sales Other Than Sales of Tangible Personal Property (Regulation 25135-2) for assigning sales as if the business entity made had made an election to use the new single sales factor apportionment method.

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