California FTB Update: LLC Fees & Tax Credits
What changed this week
| Development | Who it affects |
|---|---|
| LLC Fee Deadline and Underpayment Penalty | LLC owners and members whose California-sourced gross income plus cost of goods sold is expected to reach $250,000 or more this year, including newly formed or newly registered LLCs. |
| New CA Interest Rates Take Effect January 1, 2027 | Any business or individual with an unpaid California tax balance, an installment plan, or a pending corporate refund between January 1 and June 30, 2027. |
| New Law Cuts First-Year LLC/LP Tax to $400 and Extends the Business Credit Limitation | Owners planning to form or register a new LP, LLC, or LLP in California for a taxable year beginning between January 1, 2027, and December 31, 2029; and any business that relies on California tax credits subject to the business credit limitation. |
| $350 Million California Competes Tax Credit: New Application Windows | California businesses of any size that are expanding, relocating operations into California, or deciding whether to stay and grow in the state rather than move operations elsewhere. |
| Dormant California Entity? FTB’s Dissolution Program Can Erase Back Taxes | Owners of a California corporation or LLC that was formed or registered more than a year ago but never actively operated, or that stopped operating without ever formally closing it with the state. |
| Misclassified a Pass-Through Entity Tax Payment? How to Correct It | Pass-through entities, S corporations, partnerships, and LLCs taxed as such, that have elected or plan to elect California’s PTE elective tax as a workaround to the federal SALT cap. |
LLC Fee Deadline and Underpayment Penalty
California’s Franchise Tax Board reminds owners that any limited liability company not taxed as a corporation must pay the annual LLC fee once it is organized, registered, or doing business in California and its total California-source income for the year reaches $250,000 or more. For LLC fee purposes, that income figure means gross income plus the cost of goods sold paid or incurred in the trade or business, not net profit, so a high-revenue, low-margin business can still owe the fee. The fee is tiered: $900 for total California income of $250,000 to $499,999; $2,500 for $500,000 to $999,999; $6,000 for $1,000,000 to $4,999,999; and $11,790 for $5,000,000 or more. Calendar-year LLCs must pay the estimated fee by the 15th day of the sixth month of the taxable year, using Form 3536, Estimated Fee for LLCs, or FTB’s Web Pay portal; fiscal-year LLCs follow the same 15th-day-of-the-sixth-month rule for their own tax year. If the amount paid is less than what is owed, FTB assesses a 10% penalty on the shortfall, plus a possible separate late-payment penalty for the same year. FTB will not impose the underpayment penalty if the estimated fee paid equals or exceeds the LLC’s prior-year fee, and the prior year does not need to be a full 12 months for that exception to apply.
Who it affects: LLC owners and members whose California-sourced gross income plus cost of goods sold is expected to reach $250,000 or more this year, including newly formed or newly registered LLCs.
What to do
Estimate this year’s total California income now, pay the tiered fee using Form 3536 or Web Pay by the 15th day of the sixth month of your tax year, and if you’re unsure of the estimate, pay at least last year’s fee amount to avoid the 10% underpayment penalty.
Primary source: California FTB, Form 3536, Estimated Fee for LLCs (Tax News, September 2026) · California FTB, Common Penalties and Fees
New CA Interest Rates Take Effect January 1, 2027
FTB has announced that the interest rate applying to underpaid personal income, corporate income, and franchise taxes will be 7%, compounded daily, for the six-month period running from January 1, 2027, through June 30, 2027. For the same period, corporations that overpay their tax will earn a lower 4% rate on the resulting refund. These rates apply broadly across California’s income-based tax programs and determine how much interest accrues on balances owed to the state, or on refunds the state owes back, during that window. FTB revisits and adjusts these rates on a semiannual basis, so the cost of a late payment, or the return on a refund, can shift from one six-month period to the next. Because the underpayment rate of 7% is notably higher than the 4% corporate overpayment rate, it is materially more expensive to carry a balance due to FTB than it is beneficial to be owed a refund. Business owners with an existing balance, an installment agreement, or an anticipated refund spanning the January-June 2027 window should build the new rate into their cash-flow and estimated-tax planning rather than assume the prior rate still applies.
Who it affects: Any business or individual with an unpaid California tax balance, an installment plan, or a pending corporate refund between January 1 and June 30, 2027.
What to do
Recalculate the cost of carrying any FTB balance using the new 7% rate, and factor the lower 4% corporate refund rate into decisions about paying down a balance early versus waiting on an expected refund.
Primary source: California FTB, Adjusted Interest Rates for January 1, 2027, through June 30, 2027 (Tax News, September 2026)
New Law Cuts First-Year LLC/LP Tax to $400 and Extends the Business Credit Limitation
California Senate Bill 122 (Chapter 23), approved by the Governor on June 29, 2026, is this year’s main budget trailer bill affecting business taxpayers. It amends Revenue and Taxation Code sections 17935, 17941, and 17948 to reduce the annual tax on a new limited partnership, a limited liability company not classified as a corporation, or a limited liability partnership from $800 to $400 for that entity’s first taxable year. The reduced first-year tax applies only to taxable years beginning on or after January 1, 2027, and before January 1, 2030; outside that window, the standard $800 annual tax still applies. The same bill also extends California’s temporary business tax credit limitation, under which specified tax credits generally cannot reduce a taxpayer’s tax liability beyond a set cap, through taxable years beginning before January 1, 2030. Starting with taxable years beginning on or after January 1, 2030, a new permanent limitation takes over: specified tax credits can offset no more than 70% of a taxpayer’s tax or net tax, or $5 million, whichever is greater, and any credit disallowed by the cap carries forward to future years rather than being lost.
Who it affects: Owners planning to form or register a new LP, LLC, or LLP in California for a taxable year beginning between January 1, 2027, and December 31, 2029; and any business that relies on California tax credits subject to the business credit limitation.
What to do
If you’re timing a new LP, LLC, or LLP formation, structure it so the entity’s first taxable year begins on or after January 1, 2027, and before January 1, 2030, to qualify for the reduced $400 first-year tax instead of $800; if your business carries large California credit balances, start modeling how the 70%-of-tax-or-$5-million cap taking effect in 2030 will affect the credits you can actually use.
Primary source: California SB 122 (Chapter 23, 2026)
$350 Million California Competes Tax Credit: New Application Windows
The California Competes Tax Credit (CCTC) is a negotiated income tax credit available to businesses that want to locate in California or stay and grow in the state. CCTC agreements are negotiated by the Governor’s Office of Business and Economic Development (GO-Biz) and approved by a statutorily created CCTC Committee. For fiscal year 2026/2027, businesses can apply for an allocation during one of three separate application periods: July 20 through August 10, 2026 (already closed), January 4 through January 25, 2027, and March 1 through March 15, 2027. During the initial application period alone, a total of $350 million in tax credits was available for allocation, with additional funding expected across the remaining two periods. Applications are submitted online at calcompetes.ca.gov. Because CCTC awards are negotiated rather than automatic, businesses typically need to document planned hiring, capital investment, or expansion commitments as part of the application, and stronger applications tend to tie the credit request to measurable job creation or investment inside California.
Who it affects: California businesses of any size that are expanding, relocating operations into California, or deciding whether to stay and grow in the state rather than move operations elsewhere.
What to do
Start preparing a CCTC application now, including hiring and investment projections, so it’s ready before the January 4-25, 2027, or March 1-15, 2027, windows open at calcompetes.ca.gov.
Primary source: GO-Biz, California Competes Tax Credit · GO-Biz, Notice: California Competes Tax Credit Fiscal Year 2026-27
Dormant California Entity? FTB’s Dissolution Program Can Erase Back Taxes
FTB is reminding business owners that a qualified domestic corporation or domestic LLC that was registered but never properly dissolved or canceled may request a voluntary administrative dissolution or cancellation. Upon a written request, FTB may abate unpaid qualified taxes, penalties, fees, and interest for the taxable years covered by the entity’s certification. To qualify, the entity must certify, under penalty of perjury, that it is not actively conducting any transaction for financial or monetary gain, that it has ceased doing business or never did business, and that it holds no remaining assets in the entity’s name. The entity must also have been registered with the Secretary of State for more than 12 months. Only an officer, owner, member, director, or an authorized power-of-attorney holder can submit the request, using Form FTB 3715 PC for corporations or Form FTB 3716 PC for LLCs. Importantly, this relief does not exempt the entity from filing and fully paying tax liabilities for any year it actually conducted business, and it does not by itself legally terminate the entity; the business must still separately file dissolution or cancellation paperwork with the Secretary of State to close it for good.
Who it affects: Owners of a California corporation or LLC that was formed or registered more than a year ago but never actively operated, or that stopped operating without ever formally closing it with the state.
What to do
If you have a dormant entity racking up minimum franchise tax and penalties, certify under penalty of perjury that it has no activity and no assets, file Form FTB 3715 PC (corporation) or FTB 3716 PC (LLC), and separately file closing paperwork with the Secretary of State.
Primary source: California FTB, Voluntary Administrative Dissolution/Cancelation · California FTB, Form 3715 PC (Corporation) · California FTB, Form 3716 PC (LLC)
Misclassified a Pass-Through Entity Tax Payment? How to Correct It
FTB’s Taxpayers’ Rights Advocate is highlighting a recurring issue for pass-through entities (PTEs) that elect California’s PTE elective tax: payments designated as the wrong payment type. Under Revenue and Taxation Code sections 19904(a)(2) and 19914(a)(2), any error involving the June 15 PTE elective tax payment must be corrected by June 15 of the same taxable year as the election, with no statutory exceptions for late corrections. This is a recurring, annual requirement tied to the taxable year of each election, not a single one-time deadline. If a June 15 PTE elective tax payment is not made and corrected in the proper form by that deadline, the election is invalid for taxable years 2022 through 2025, and for taxable years 2026 through 2030 qualified taxpayers instead receive a reduced credit. To fix a misdesignated payment, the entity must submit a written, signed request, signed by an officer or owner of the entity or by a representative with a valid Power of Attorney on file, that explains the error and acknowledges that correcting it may trigger penalties and interest. FTB’s own example illustrating the process: an S corporation made a May 15 payment intended as its June 15 PTE elective tax payment but designated it as an estimated tax payment; to preserve the full credit, it had to submit the written correction before June 15 of that same taxable year.
Who it affects: Pass-through entities, S corporations, partnerships, and LLCs taxed as such, that have elected or plan to elect California’s PTE elective tax as a workaround to the federal SALT cap.
What to do
Each year you make a PTE elective tax payment, confirm it was designated correctly as soon as it’s made. If you find an error, submit a signed written correction request from an officer, owner, or valid POA well before June 15 of that same taxable year — for example, a payment tied to the 2027 election must be corrected by June 15, 2027. Call the Tax Practitioner Hotline at 916-845-7057 with questions.
Primary source: California FTB, Pass-Through Entity Elective Tax FAQs
What this means for your business
- LLC owners with $250,000+ in California income must pay the tiered LLC fee by the 15th day of the sixth month of their tax year, or face a 10% underpayment penalty.
- FTB’s interest rate on underpaid tax rises to 7% (4% for corporate overpayments) for January-June 2027, so plan cash flow accordingly.
- A new state law, SB 122 (Chapter 23), cuts the first-year minimum tax for LPs, LLCs, and LLPs formed in tax years 2027-2029 from $800 to $400, and caps most business credits at 70% of tax or $5 million starting in 2030.
- The $350 million California Competes Tax Credit reopens for applications January 4-25, 2027, and March 1-15, 2027, at calcompetes.ca.gov.
- Dormant California corporations and LLCs can request relief from back taxes and penalties via Form 3715 PC or 3716 PC, and PTE elective tax payment errors must be corrected by June 15 of the taxable year of the election, every year, not just once.
California FTB Update: LLC Fees, Tax Credits, and New Rules for Business Owners
This edition of California FTB Tax News covers new 2027 interest rates, a reduced first-year minimum tax for LPs, LLCs, and LLPs, a fresh $350 million California Competes Tax Credit window, and relief programs for LLC fee penalties, dormant entities, and misclassified pass-through entity tax payments.
Frequently asked questions
Q. Do I owe the California LLC fee even if my LLC didn’t turn a profit?
Possibly yes. The LLC fee is based on total California income, gross income plus cost of goods sold, not net profit, so a high-revenue business with thin or negative margins can still owe $900 to $11,790 once California-source income reaches $250,000.
Q. Is the California Competes Tax Credit still open right now?
The initial 2026/2027 application window (July 20-August 10, 2026) has closed, but two more windows are scheduled for January 4-25, 2027, and March 1-15, 2027, with a total of $350 million available for the fiscal year.
Q. What if I formed a California LLC years ago and never actually used it?
You may qualify for FTB’s voluntary administrative dissolution or cancelation program, which can abate unpaid taxes, penalties, and interest for a dormant entity with no assets and no business activity, but you still need to separately file dissolution paperwork with the Secretary of State to fully close it.
