WHEN CA NONRESIDENT WITHHOLDING COMMENCES???

[SLOCalCPA]

CA requires that entities withhold 7% CA taxes on distributions of CA income to nonresident partners/beneficiaries.

If a CA LLC made distributions of income to CA nonresident members (consisting of both individuals and nongrantor trusts that became CA nonresidents mid-year), when are they required to commence withholding the 7% taxes?

CA Code Regs 18662-1(c) states that "withholding of tax at source is required when a withholding agent is notified in writing by the Franchise Tax Board to withhold tax from California source income".

FTB Pub 1017 ("resident and Nonresident Withholding Guidelines") states that "We annually mail notices to S corporations and partnerships that are first-time filers. Additionally, we provide notice annually in the S corporation and partnership information return instructions. S corporations and partnerships that do not file California S corporation or partnership information returns when required to file are still considered to have received constructive notice of the withholding requirements. Constructive notification is considered to have been given on the due date of the S corporation and partnership information return (without regard to any extensions of time to file)."

So if the LLC failed to withhold the 7% taxes during year 2021, and had not yet received the FTB Notice instructing them to do so (they have not yet filed their 2021 tax returns, so the FTB would not yet know of the members' nonresident status), does it appear that they can NOT be held liable for having failed to withhold that year? (but would clearly need to start withholding beginning with the original due date of the 2021 LLC tax returns?

We're dealing with some fairly significant tax amounts, so any advice is certainly appreciated!

[Strongsilence-CPA]

caltax.com has your answer. They have a useful message board.  Also, buy this terrific reference. I do not get a commission.

Spidell’s Analysis and Explanation of California Taxes® 2022 Edition (The Big Blue Answer Book™)

[SLOCalCPA]

Hi - thank you for your response...much appreciated.

However, I have posted this question on the caltax.com message board, and also do own the Big Blue Answer Book (as well as Checkpoint), but have been unable to locate an answer to my specific question with any of these resources.   Even the FTB agent in charge of nonresident withholding issues told me that she is unfamiliar with the "Constructive Receipt" referred to in their own Pub 1017.

If you do happen to know where I'd find the answer with any of these, I'd certainly be thrilled to know!

[Strongsilence-CPA]

If you are in SLOtown, we are both on the central coast. I'm 90 miles south.  Good to have you here!

I would be shocked if a taxpayer didn't have to withhold until receipt of an FTB notice. Shocked I tell you.

The chart at 29-201 has the answer.  Withhold and pay quarterly.  It is page 325 of the 2022 edition.

Consider the group composite return which allows the LLC to withhold.  See page 328 under the heading Waivers and reduced withholding.  The composite return makes withholding easier by avoiding the withholding on individuals. I have not done a composite return in a long time.