Beginning January 2015, the state of California mandated that all business returns be electronically filed. The law applies to preparers who file the return on behalf of a business entity.
If the preparer can't electronically file the return, they must complete a waiver online. Once the waiver has been completed, the return can be mailed to the Franchise Tax Board. If a waiver isn't completed within fifteen days of the return being filed, the state will contact the preparer.
Table of contents:
When did the mandate begin? What taxable years does it cover?
California law requires business entities to file electronically beginning January 1, 2015, for taxable years beginning on or after January 1, 2014.
Is there a waiver provision in the law to allow exceptions to e-filing a required return?
Yes, the law contains a waiver provision that allows an entity to request a waiver from e-filing a return if it can be shown that the inability to e-file is due to, but not limited to, technology constraints, undue financial burden, or other circumstances that constitute reasonable cause and not willful neglect.
How do I request a waiver?
You may use the Business entity e-file waiver request form to request a waiver when the return can't be e-filed.
If the hyperlink above doesn't work, you may also copy the following address into your internet browser: https://www.ftb.ca.gov/tax-pros/efile/business-eFile-waiver-request.asp?WT.mc_id=akBEWaiver
Is there a paper version of the e-file waiver?
No, waivers can only be completed using the online form. The waiver will be approved automatically, so the return can be filed with the state once the waiver has been completed. The waiver is required for returns filed after January 1, 2015 for tax years beginning in 2014.
Who must e-file a business tax return under this law?
Any business entity that files an original or amended return after January 1, 2015 for tax years beginning in 2014 prepared using tax preparation software must e-file their return with the Franchise Tax Board (FTB). The law applies to preparers who file the return on behalf of a business entity.
What types of returns must be e-filed under this law?
Any return that is considered acceptable. Acceptable returns include any original and amended returns, including:
- Corporation returns (Forms 100, 100S, 100W),
- Partnership returns (Form 565),
- LLC returns (Form 568), and
- Exempt organization returns (Form 199).
You can find a complete list of the acceptable forms and schedules on the FTB website.
This law doesn't apply to the filing of Form 109, Exempt Organization Business Income Tax Return or Form 541, Fiduciary Income Tax Returns.
When will this law take effect?
This law was put into effect on January 1, 2015.
When is the e-file waiver due?
Your waiver may be submitted prior to, or up to 15 days after filing the tax return.
Where can I read more about the law?
Assembly Bill (AB) 2754 added California Revenue & Taxation Code, Sections 18621.10 and 19171. You can view the chaptered bill online on the California Legislative Information website. See Sections 5 and 6 of the bill.
How will FTB enforce the law?
A business entity required to e-file, pursuant to Section 18621.10, that files a return in a manner that fails to comply with Section 18621.10, shall be subject to a penalty if the failure to e-file is due to willful neglect and not reasonable cause.
How much is the penalty?
The penalty, applied at the entity level, is $100 for an initial failure to e-file and $500 for each subsequent failure.
When will the penalty take effect?
The penalty will take effect in January of 2017.
Why is business e-file required?
By making business e-file required, the cost of processing business income tax returns is significantly reduced. E-filed returns are more accurate and contain less errors than paper returns. The e-file program checks returns for common error conditions before the returns are processed. This provides the business entity with the opportunity to correct the return and avoid a notice. The error rate for paper returns is approximately 10%, while e-file returns have an error rate of less than 1%.
Are combined (parent/subsidiary) returns included in the requirement?
Yes. Combined returns are included in the requirement. Combined returns are acceptable in our e-file program.
Who does the penalty apply to in a combined reporting situation?
If a return is filed on behalf of a combined reporting group, the penalty will apply to the combined reporting group and not to an electing member or subsidiary of that group.
Are combined report return filers required to file a separate waiver for each entity in the combined report?
No, combined return filers should submit one waiver for a combined return on behalf of the parent and all subsidiaries in the combined group being reported on the return in question.
If I file multiple business entity returns in a year, do I need to submit a waiver request for each entity?
Yes, you must submit a separate online waiver request form for each entity subject to the e-file requirement.
For tax year 2015, is an electronic copy of the Federal 1120-C and 1120-H included with the CA state filing?
No. The IRS doesn't have electronic filing support for the Federal 1120-C U.S. Income Tax for Cooperative Associations and 1120-H U.S. Income Tax for Homeowners Associations. However, the state requires a copy of these
Federal returns when applicable so they would be attached to the tax year 2015 CA return as a PDF attachment with the title "Federal Return."
Beginning in tax year 2015, California electronic filing is now allowed with a Federal 1120-C or 1120-H return. Attach the entire Federal 1120-C return as a PDF with the description "Federal Return" to the California electronic return.
In prior years, the federal Form 1120-C, U.S. Income Tax for Cooperative Associations, and Form 1120-H, U.S. Income Tax for Homeowners Associations, weren't supported by the IRS for electronic filing, which is why a PDF copy of the return was required to be attached to the California return in order to be filed with the state.