Note: For a discussion of the California corporate alternative minimum tax, see ¶26-200.

Generally, all corporations incorporated, organized, qualified, or registered to do business in California must pay an $800 minimum franchise tax each year until dissolved. (R&TC §23153) The minimum franchise tax must be paid whether the corporation is active, inactive, operates at a loss, or files a return for a short-period return.

There are two exceptions: The 15-days-or-fewer rule and the first-year-free rule.

15-days-or-fewer rule

Under R&TC §23114, a corporation is not subject to the minimum franchise tax if it did not do business in California during the taxable year, and the taxable year was 15 days or fewer.

For a portion of a month to be disregarded under this rule for a new corporation, its Articles of Incorporation would have to be filed no sooner than a certain day depending on the length of the month:

• A 28-day month: on the 15th day or after;
• A 29-day month: on the 16th day or after;
• A 30-day month: on the 16th day or after; or
• A 31-day month: on the 17th day or after.

According to the FTB, a corporation that qualifies under R&TC §23114 is not required to file a tax return for the short period.

“First-year-free” rule

A corporation is exempt from the minimum franchise tax for its first year, which is paid as the first estimated tax payment. However, the corporation must pay tax on the first year’s income. For example, a corporation that formed in 2017 and had net income of $1,000 for the 2017 taxable year must pay franchise tax at 8.84% (1.5% for S corporations). (R&TC §23153)

The minimum franchise tax forgiveness rule does not apply to:

• Limited partnerships;
• Limited liability companies (not classified as corporations);
• Limited liability partnerships;
• Charitable organizations;
• Regulated investment companies;
• Real estate investment trusts;
• Real estate mortgage investment conduits;
• Financial asset securitization investment trusts;
• Qualified Subchapter S subsidiaries;
• Credit unions; or
• Corporations that reorganize solely to avoid payment of the minimum franchise tax.

An LLC that elects to be taxed as a corporation in the first year is not subject to the minimum tax.

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. (R&TC §23114)

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. (R&TC §23153)

See Example 23-1.