June 21, 2019

All You Need to Know About the Bill

By David W. Klasing, CPA, Esq.
California is home to some of the world’s largest and most successful companies. From the tech sector in the Silicon Valley to the booming entertainment industry in Los Angeles and Orange County, the operation of thriving businesses in our state is alive and well. It, too, is no surprise that those looking to make it big by building up their own companies often begin their journey in California.

But as we primarily focus on the companies that are flourishing, what about those that aren’t? What about those businesses that begin operation but subsequently close their doors and disappear?

Responsible for administering business taxes in the state, the FTB is responsible for working with or leaving their business entity sitting dormant. What those business owners routinely do not know is that taxes like California’s minimum tax or the franchise tax continue to accrue until the business is properly dissolved. One can only imagine the enormous administrative burden this places on the FTB chasing down the downtrodden owners of failed California or never utilized “shelf” business entities.

The Old Way
Before 2019, a business that failed in California and quite often entities that were formed, but not utilized, while not generating income tax liability on a yearly basis, continue to generate “minimum” taxes levied on all California businesses, regardless of operational status. 

Unpaid taxes for dormant companies would build up at the FTB, prompting the expenditure of time and money to collect on them. But in all reality, such taxes likely never would be paid. By the time the owners of the abandoned businesses realize they did not properly dissolve the entity, they might have financial difficulty doing so due to the accumulation of minimum or franchise taxes.

Enlightened business owners occasionally considered the consequences of walking away from a California business after the Ralite decision, which set out certain factors that could prevent the FTB from using equitable principles to pierce the corporate veil and hold individual shareholders responsible for the tax delinquency of the corporation or LLC.

Understanding AB 2503’s Provisions
Assembly Bill 2503 attempts to facilitate the FTB to efficiently clear many of the dormant or failed companies from its records, freeing up resources to focus on the taxation of active businesses. 

To achieve that end, the law allows the FTB to work with the Secretary of State to administratively dissolve domestic corporations and LLCs that have not operated for at least 60 months and have complied with all tax filing requirements and paid the underlying taxes as of the day that the company ceased doing business. AB 2503 also allows the FTB to dissolve corporations and LLCs that have been suspended by the FTB for at least five years. The new law authorizes the FTB to abate certain annual taxes, such as the minimum and franchise taxes that accrued after the date the company ceased doing business in California. 

Business owners that would like to voluntarily dissolve their corporations or LLCs can lodge a request with the FTB to abate all taxes that the company accrued during their inactive period, as well as associated penalties and interest, with the stipulation that the company will be administratively dissolved.

Lastly, business owners that wish to fight the dissolution prompted by the FTB may file an objection; pay any back taxes, penalties and interest; and file a reviver request form.

Outstanding Taxes Prior to Inactivity
It’s important to understand that AB 2503 does not abate or otherwise forgive any taxes that were accrued prior to the corporation or LLC ceasing operations. Thus, owners of businesses that failed to file tax returns or did not pay the income taxes while an operating entity are still on the hook. Another anticipated practical effect of AB 2503 is the freeing up of FTB resources to more aggressively go after those businesses with tax debts that resulted from actual operations. 

CPAs representing owners of businesses with non-abateable outstanding tax obligations should be ready to discuss their client’s compliance and payment options.

Conclusion
AB 2503 was written with the intention of being taxpayer friendly and as a mechanism whereby the FTB could efficiently clean up its rolls of dormant companies that accrued taxes while in a non-operational status. The law gives California CPAs, enrolled agents and tax attorneys one more tool that can be used to effectively counsel clients on their entrepreneurial journey.
David W. Klasing, CPA is the owner/operator of The Tax Law Offices of David W. Klasing.