California Tax: 10 Tips to Complete the LLC Income Worksheet
We compiled a list of common errors we see on the LLC Income Worksheet. The following is a top ten list to help you file correctly:
1. The FTB 568w, Limited Liability Company Income Worksheet is based on "total income derived from or attributable to California," not worldwide income. It includes income from all sources, such as income from trade or business activities, rentals, interest, and dividends. When completing the LLC income worksheet, only include California amounts. If your LLC is a multimember LLC that operates only in California, you will transfer the amount from Form 568, Schedule B, line 3 to the worksheet, line 1a. However, if the LLC operates inside and outside California, line 1a of the LLC income worksheet will not be the same as Form 568, Schedule B, line 3, so only include California amounts from Schedule B, line 3 on the worksheet, on line 1a. Single-member LLCs (SMLLCs) that are disregarded entities for income tax purposes will generally enter California amounts based on their books and records on their LLC Income Worksheet for the purpose of determining their fee. (Only SMLLCs whose income meets certain threshold amounts are required to complete Schedules B and K.) For more information on "total income from all sources derived from or attributable to California," see the instructions for the LLC income worksheet on page 12 of the 2009 Form 568, Limited Liability Company Tax Booklet.
2. Do not forget to subtract out the lower tier LLC gross receipts when computing the upper tier LLC's fee. An LLC is allowed to back out the gross receipts from a lower tiered LLC that were already subject to the fee. The lower tier's gross receipts must be included on the worksheet, usually on line 3a through line 3c. The upper tier LLC backs out the gross receipts from a lower tier LLC on line 3d. It is important that the upper tier LLC include the receipts of a lower tier LLC on the worksheet, and then back out the receipt already subject to the fee on line 3d. Keep in mind, receipts received from a lower tiered partnership that are not LLCs are not backed out on line 3d.
3. Form 568, line 1 must match the amount from LLC Income Worksheet, line 17. A very common error is to enter Form 568, Schedule B, line 23 on Form 568, line 1, which in many cases causes us to increase the LLC fee amount when processing Form 568. Sometimes when transferring the amount from the LLC worksheet, line 17 to Form 568, line 1, LLCs will make adjustments.
4. A SMLLC doing business in California must file its own return, and pay its own $800 annual tax and LLC fee based on its own income. Each LLC, regardless of whether it is a multiple-member LLC (MMLLC) or a SMLLC, must calculate total income and pay the fee at its level. Many times a parent LLC will incorrectly include total income from a lower tiered SMLLC without also backing it out, and pay the fee only at the parent level. As discussed above, the parent can back out receipts that were already subject to the fee.
5. The LLC Income Worksheet must be attached to the Form 568. If the LLC worksheet is not attached, all income is considered California income. The LLC will be assessed a fee based on total gross receipts.
6. All apportioning LLCs, except SMLLCs, must include Schedule R, Allocation and Apportionment of Income, to Form 568.
7. Schedule B does not have to reconcile with the LLC Income Worksheet. The worksheet includes only income derived from or attributable to California. Schedule B includes total worldwide income. Schedule B amounts are adjusted for differences between state and federal law, such as differences for depreciation and deductible taxes.
8. California rental real estate. In computing California rental real estate income, line 8a is the rental real estate gross income from real estate held directly by a multi-member LLC, and lines 8b and 8c are used to compute the gross rental income received by the MMLLC from other pass-though entities. Line 8b is the pass-though rental income or loss from the Schedule K-1, received from other LLCs, partnerships, estates and trusts and S corporations. Line 8c is total rental expenses deducted from the amount on line 20a federal Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation. The LLC will have to contact the pass-through entity to get the necessary information for line 8c. Line 8c must be entered as a positive number.
9. The following lines of the LLC worksheet cannot be entered as a negative number: 1b, 2b, 3b, 3c, 4, 8c, and 17.
10. Cancellation of debt is included in gross income for purposes of calculating the LLC fee (IRC 61(a)(12). California requires the income be reported in the year the debt was reduced.