California Form 100S – Fill Out and Use This PDF

CALIFORNIA

FORMS & INSTRUCTIONS

Members of the Franchise Tax Board

Betty T. Yee, Chair

George Runner, Member

Keely Bosler, Member

100S

2018

SCorporation Tax Booklet

This booklet contains:

Form 100S, California S Corporation Franchise or Income Tax Return

Schedule B (100S), S Corporation Depreciation and Amortization

Schedule C (100S), S Corporation Tax Credits

Schedule D (100S), S Corporation Capital Gains and Losses and Built-In Gains

Schedule H (100S), S Corporation Dividend Income Deduction

Schedule QS, Qualified Subchapter S Subsidiary (QSub) Information

Schedule K-1 (100S), Shareholder’s Share of Income, Deductions, Credits, etc.

FTB 3539, Payment for Automatic Extension for Corporations and Exempt Organizations

FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations — Corporations

For more information regarding e-file, go to ftb.ca.gov and search for business eile.

In general, for taxable years beginning on or after January 1, 2015, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2015. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to ftb.ca.gov and search for conformity. Additional information can

be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540 or 540NR), and the Business Entity tax booklets.

The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the instructions. Taxpayers should not consider the instructions as authoritative law.

What’s New/Tax Law Changes

Federal Tax Reform – The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, made changes to the IRC. In general, the California R&TC does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015, with modifications.

Deferred Foreign Income – Under IRC

Section 965, if the S corporation owns (directly or indirectly) certain foreign corporations, it may have to include certain deferred foreign income on its income tax return. California does not conform. If the S corporation reported IRC Section 965 inclusions and deductions on Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K for federal purposes, write “IRC 965” at the top of Form 100S, California S Corporation Franchise or Income Tax Return.

Global Intangible Low-Taxed Income (GILTI) - Under IRC Section 951A, if the S corporation is a U.S. shareholder of a controlled foreign corporation, the S corporation must include GILTI in its income. California does not conform.

Depreciation Limitations - The TCJA amended IRC Section 280F relating to depreciation limitations on luxury automobiles. California does not conform to the federal amendments under the TCJA. For more information, get Schedule B (100S), S Corporation Depreciation and Amortization.

Net Operating Losses (NOLs) – The TCJA made changes to the rules for NOLs. California law does not conform to those changes. California taxpayers continue to compute NOLs in conformity to federal rules as of

the specified date of January 1, 2015, with modifications. For more information, see General Information Section X, Net Operating Loss.

Capital Assets – The TCJA amended IRC Section 1221 excluding a patent, invention, model or design (whether or not patented), and a secret formula or process held by the taxpayer who created the property (and certain other taxpayers) from the definition of a capital asset. California does not conform to this amendment under the TCJA. For California purposes, IRC Section 1221 as of January 1, 2015, applies.

Qualiied Opportunity Zone Funds – The TCJA established Opportunity Zones.

IRC Sections 1400Z-1 and 1400Z-2 provide a temporary deferral of inclusion of gross income for capital gains reinvested in a qualified opportunity fund, and exclude capital gains from the sale or exchange of an investment in such funds. California does not conform to the deferral and exclusion of capital gains reinvested or invested in federal opportunity zone funds and has no similar provisions.

Like-Kind Exchanges – The TCJA amended IRC Section 1031 limiting its application to real property that is not primarily held for sale. Additionally, under the TCJA, exchanges of personal property and intangible property do not qualify for non-recognition of gain or loss as like-kind exchanges. California does not conform to the amendments under the TCJA. For California purposes, IRC Section 1031 as of January 1, 2015, applies.

New Employment Credit – The sunset date for the New Employment Credit is extended until taxable years beginning before January 1, 2026. For more information, go to ftb.ca.gov and search for nec or get form FTB 3554, New Employment Credit.

California Competes Credit – The sunset date for the California Competes Tax Credit is extended until taxable years beginning before January 1, 2030. For more information, go to the GO-Biz website at business.ca.gov or ftb.ca.gov and search for ca competes or get form FTB 3531, California Competes Tax Credit.

Conformity – For updates regarding the federal acts, go to ftb.ca.gov and search for conformity.

Important Information

yThe Franchise Tax Board (FTB) offers e-filing for the following entities:

y Corporations filing Form 100S and certain accompanying forms and schedules.

y Corporations filing Form 100X, Amended Corporation Franchise or Income Tax Return.

Check with the software providers to see if they support business e-filing.

yFor taxable years beginning on or after January 1, 2014, California law requires any business entity that files an original or amended tax return that is prepared using tax preparation software to electronically file (e-file) their tax return with the FTB. For more information, go to ftb.ca.gov and search for business eile.

yFor taxable years beginning on or after January 1, 2016, the extension period for filing an S corporation tax return has changed from seven months to six months. Get FTB Notice 2016-04 for more information.

yCorporations can make payments online using Web Pay for Businesses. Corporations can make an immediate payment or schedule payments up to a year in advance. Go to ftb.ca.gov/pay.

yCorporations can use a Discover, MasterCard, Visa, or American Express Card to pay business taxes. Go to oficialpayments.com. Official Payments Corp. charges a convenience fee for using this service.

yCorporations can make an estimated tax or extension payment using tax preparation software. Check with the software provider to determine if they support Electronic Funds Withdrawal (EFW) for estimated tax or extension payments.

yIf the S corporation made purchases from out-of-state or Internet sellers and owes California use tax, the S corporation may report and pay the tax on the S Corporation Franchise or Income Tax Return.

For taxable years beginning on or after January 1, 2015, if an S corporation includes use tax on its income tax return, payments and credits will be applied to use tax first, then towards franchise or income tax, interest, and penalties. For more information, see General Information EE, California Use Tax, and Specific Line Instructions.

yIf the S corporation was involved in a reportable transaction, including a listed transaction, the S corporation may have a disclosure requirement. Attach federal Form 8886, Reportable Transaction Disclosure Statement, to the back of the California return along with any other supporting schedules. If this is the first time the reportable transaction is disclosed on the return, send a duplicate copy of federal Form 8886 to the address below:

TAX SHELTER FILING ATSU 398 MS: F385

FRANCHISE TAX BOARD PO BOX 1673 SACRAMENTO CA 95812-9900

The FTB may impose penalties if the S corporation fails to file federal Form 8886, Form 8918, Material Advisor Disclosure Statement, or any other required information. A material advisor is required to provide a reportable transaction number to all taxpayers and material advisors

for whom the material advisor acts as a material advisor. For more information, go to ftb.ca.gov and search for disclosure obligation.

yCalifornia taxpayers whose taxable year begins on or after June 30, 2016, and who are required to file the federal forms listed below with the Internal Revenue Service (IRS), must also attach copies of these forms to the California tax return:

y Federal Form 8975, Country-by-Country Report

y Federal Schedule A (8975), Tax Jurisdiction and Constituent Entity Information

For additional information, refer to the Instructions for Form 8975, Revenue Procedure 2017-23, 2017-7 Internal Revenue Bulletin 915, and see General Information M, Penalties, and General Information V, Information Returns.

yAn S corporation that expects a net operating loss (NOL) in the 2019 taxable year, can file form FTB 3593, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback, to extend the time for payment of taxes for the immediately preceding 2018 taxable year. This includes extending the time for payment of a tax deficiency. The payment of tax that can be postponed cannot exceed the expected overpayment from the carryback of the NOL. For more information, get form FTB 3593.

yFor taxable years beginning on or after January 1, 2014, the IRS allows corporations with at least $10 million but less than $50 million in total assets at tax year end to file Schedule M-1 (Form 1120S), Reconciliation of Income (Loss) per Books With

Income (Loss) per Return, in place of Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More, Parts II and III. However, Schedule M-3 (Form 1120S), Part I, is required for these corporations. For California purposes, the S corporation must complete the California Schedule M-1. For more information, see the instructions for Schedule M-1, Reconciliation of Income (Loss) per Books With Income (Loss) per Return, in this booklet.

yFor taxable years beginning on or after January 1, 2014, California requires taxpayers who exchange property located in California for like-kind property located outside of California, under

IRC Section 1031, to file an annual

information return with the FTB. For more information, get form FTB 3840, California Like-Kind Exchanges, or go to ftb.ca.gov and search for like kind.

yFor an NOL incurred in a taxable year beginning on or after January 1, 2015, the carryback amount is 100% of the NOL. For more information, see General Information X, Net Operating Loss or form FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Corporations, included in this booklet.

yR&TC Section 25128.7 requires all business income of an apportioning trade or business, other than an apportioning trade or business under R&TC

Section 25128(b), to apportion its business income to California using the single-sales factor formula. For more information, get Schedule R, Apportionment and Allocation of Income, or go to ftb.ca.gov and search for single sales factor.

yR&TC Section 25136 requires all taxpayers to assign sales, other than sales of tangible personal property, using market assignment. For more information, get Schedule R or go to ftb.ca.gov and search for market assignment.

yBeginning on or after January 1, 2012, a type of corporation called a “benefit corporation” can be formed with the purpose of creating general public benefit, provided certain requirements are met. An existing corporation can become a “benefit corporation”, if certain procedures are followed. In addition,

a “benefit corporation” can be created through a merger or reorganization, if certain requirements are met. For more information, see the Corporations Code, commencing with Section 14600.

yBeginning on or after January 1, 2012, a type of corporation called a “flexible purpose corporation” could be formed, provided certain requirements were met. An existing corporation could merge or convert into a “flexible purpose corporation”, upon completion of certain requirements. A “flexible purpose corporation” must have

a special purpose, which may include but is not limited to, charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation. For more information, see the Corporations Code, commencing with Section 2500.

yEffective January 1, 2015, all references to “flexible purpose corporations” in the Corporations Code are changed to “social purpose corporations,” although the requirements are substantially the same as prior law. Any flexible purpose corporation formed before January 1, 2015, may elect to amend its articles of incorporation to change its status to a “social purpose corporation.” If a flexible purpose corporation formed prior to January 1, 2015, does not amend its

articles of incorporation to change its status, any reference to “social purpose corporation” in the Corporation Code is deemed a reference to a “flexible purpose corporation.” For more information, see the Corporations Code commencing with Section 2500.

yR&TC Section 24343.2:

y Disallows the deduction for payments made to a club that restricts membership or the use of its services or facilities on the basis of ancestry or any characteristic listed or defined in Section 11135 of the Government Code.

y Excludes genetic information from the characteristics listed or defined in Section 11135 of the Government Code.

y“Gross receipts” means the gross amounts realized (the sum of money and the fair market value of other property or services received) on:

y The sale or exchange of property, y The performance of services, or

y The use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain,

or loss is recognized (or would be recognized if the transaction were in the United States) under the IRC.

Amounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold. For a complete definition of “gross receipts,” refer to R&TC Section 25120(f).

yR&TC Section 25135(b) adopts the Finnigan rule in assigning sales from tangible personal property.

For more information regarding “gross receipts” or “Finnigan rule,” get Schedule R or go to ftb.ca.gov and search for corporation law changes.

yFor taxable years beginning on or after January 1, 2007, interest and dividends from intangible assets held in connection with a treasury function of the taxpayer’s unitary business, as well as the gross receipts and any overall net gain from the maturity, redemption, sale, exchange, or other disposition of these assets, are excluded from the sales factor. This exclusion encompasses the use of futures contracts and options contracts to hedge foreign currency fluctuations. See Cal. Code Regs., tit. 18 section 25137(c)(1)(D) for more information. For taxable years beginning on or after January 1, 2011, see R&TC Section 25120(f).

yGroup nonresident returns may include:

y Less than two nonresident individuals. y Nonresident individuals with more than $1 million of California taxable income.

An additional 1% tax will be assessed on nonresident individuals who have California taxable income over $1 million. Get FTB Pub. 1067, Guidelines for Filing a Group Form 540NR, for more information.

yIn general, the water’s-edge rules provide for an election out of worldwide combined reporting. By electing water’s-edge,

a California taxpayer elects into a complex blend of state and federal tax concepts. See General Information T, Water’s Edge Reporting; refer to R&TC Sections 25110 and 25113; and get Form 100W, Corporation Tax Booklet – Water’s-Edge Filers, for more information.

yA C corporation is taxed on its earnings at regular corporate tax rates and the shareholders are then taxed on these earnings when they are distributed as dividends. For more information, get Form 100, Corporation Tax Booklet.

yS corporations are required to report withholding payments from the

S corporation that are allocated to all shareholders, as well as payments withheld on nonresident shareholders. Report these withholding amounts on Schedule K-1 (100S), Shareholder’s Share of Income, Deductions, Credits, etc., and Schedule K (100S), S Corporation Shareholder’s Shares of Income, Deductions, Credits, etc.

yUse form FTB 3725, Assets Transferred from Corporation to Insurance Company, to report assets transferred from a parent corporation to an insurance company. Get form FTB 3725 for more information.

yCalifornia follows the revised federal instructions (with some exceptions) for reporting the sale, exchange or disposition of an asset for which an IRC Section 179 expense deduction was claimed in prior years by a partnership, limited liability company, or S corporation.

S corporations should follow the instructions in federal Form 4797, Sales of Business Property, with the exception that the amount of gain on property subject to the IRC Section 179 recapture must be included in the S corporation’s taxable income for California purposes. See General Information FF, Property Subject To IRC Section 179 Recapture, and Specific Line Instructions for Form 100S, line 4, for more information.

Shareholders should follow federal reporting requirements as detailed in federal Form 1120S, U.S. Income Tax Return for an S Corporation, and federal Form 4797 instructions.

yA shareholder’s pro-rata share of

S corporation income is treated like a partner’s distributive share of partnership income. The items of income are characterized as if realized directly from the source from which realized by the corporation, then they are sourced according to the rule for each type of income. Valentino v. Franchise Tax Board (2001) 87 Cal. App. 4th 1284. Income from California sources is subject to California tax.

yIn general, R&TC Section 17024.5 and Section 23051.5 state that federal elections

made before a taxpayer becomes a California taxpayer are binding for California tax purposes.

yWith certain limited exceptions, payers that are required to withhold and remit backup withholding to the IRS are also required to withhold and remit to the FTB on income sourced to California. If the S corporation (payee) has backup withholding, the

S corporation (payee) must contact the FTB to provide a valid taxpayer identification number, before filing the tax return. Failure to provide a valid taxpayer identification number may result in a denial of the backup withholding credit. For more information, go to ftb.ca.gov and search for backup withholding.

yR&TC Section 18662 requires buyers to withhold income taxes when purchasing California real property from corporate sellers with no permanent place of business in California immediately after the transfer. Get FTB Pub. 1016, Real Estate Withholding Guidelines, for more information.

Sellers of California real estate must attach a copy of Form 593, Real Estate Withholding Tax Statement, to their tax return as proof of withholding.

If the corporation needs to verify withholding payments, the corporation may call Withholding Services and Compliance at 916.845.4900 or 888.792.4900.

yFor transactions that require withholding, a seller of California real estate may elect an alternative to withholding 3 1/3% of the total sales price. The seller may elect an alternative withholding amount based on the maximum tax rate for individuals, corporations, or banks and financial corporations, as applied to the gain on the sale. The seller is required to certify under penalty of perjury the alternative withholding amount to the FTB. For more information, get FTB Pub. 1016.

California law conforms to federal law for the following:

yIRC Section 1245(b)(8) relating to amortizable Section 197 intangibles property disposed on or after January 1, 2010.

yThe qualification requirements of

S corporations and their shareholders.

yDisallowing the deduction for club membership fees and employee remuneration in excess of $1 million.

yDisallowing the deduction for lobbying expenses.

yTax-exempt organizations may be shareholders in an S corporation.

yFamily farm corporations with income over $25 million may defer tax on income that was a result of changes in accounting methods required of these corporations. For calendar year taxpayers, the suspense account for these deferrals must be recaptured starting with taxable years beginning on or after January 1, 1998. For fiscal year taxpayers, the suspense account

must be recaptured starting in taxable years beginning after June 8, 1997, if the fiscal year taxpayer’s taxable year ends on or after December 31, 1997.

yFor purposes of inventory accounting, an adjustment for shrinkage, based on an estimate, may be made. Taxpayers can voluntarily change their method of accounting if the method currently being used does not utilize estimates of inventory shrinkage and the taxpayer now would like to use that method.

yRequired recognition of gain on certain appreciated financial positions in personal property.

ySecurities traders and commodities traders are allowed to elect to use the mark-to-market accounting similar to what is currently required for securities dealers. Commodities would include only commodities of a kind that are dealt within the organized commodities exchange. An election to use the mark-to-market method for federal purposes is considered an election for state purposes and a separate election is not allowed.

yLimitation on exception for investment companies under IRC Section 351.

yIf an Employee Stock Ownership Plan (ESOP) is an S corporation shareholder, items of income or loss of the S corporation that pass through to the ESOP are not treated as unrelated business taxable income (UBTI). Previously, such items were treated as UBTI.

yS corporations that establish and maintain ESOPs are not required to give participants the right to demand distributions in

the form of employer securities, if the participants have the right to receive such distributions in cash.

yAn IRC Section 338 election, relating to stock purchases treated as asset acquisitions, is treated as an election for state purposes. A separate election for state purposes is not allowed.

yExpansion of deduction for certain interest and premiums paid for company-owned life insurance.

yModification of holding period applicable to dividends received deduction.

yRepeal of special installment sales rule for manufacturers of tangible personal property.

yPayment of estimated tax for closely held real estate investment trusts (REIT) and income and services provided by REIT subsidiaries.

yReducing the compensation deduction for certain employers from $1 million

to $500,000; and making certain parachute payments nondeductible.

California law does not conform to federal law for the following:

The Federal TCJA of December 22, 2017, made changes to the IRC. In general, the California R&TC does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015,

with modifications. The following is a non- exhaustive list of the TCJA changes:

yThe change in method of accounting treatment of S corporation conversions to C corporations.

yThe expansion of the range of companies that may use the cash method of accounting.

yThe amendments to IRC Section 1031, which limits like-kind exchanges to real property that is not primarily held for sale, and excludes exchanges of personal property and intangible property as qualifying for nonrecognition of gain or loss.

yThe expanded definition of

IRC Section 179 property for certain depreciable tangible personal property related to furnishing lodging and for qualified real property for improvements to nonresidential real property.

yThe change to IRC Section 163(j) which limits business interest deduction

to 30%.

yThe modifications to the NOL provisions.

yThe deferral and exclusion of capital gains reinvested or invested in qualified opportunity zone funds.

yThe exclusion of a patent, invention, model or design, and secret formula or process from the definition of capital asset.

yThe federal modifications to depreciation limitations on luxury automobiles

(IRC Section 280F).

yIRC Section 951A, relating to global intangible low-taxed income.

yIRC Section 965, relating to treatment of deferred foreign income.

yIRC Section 382(n) relating to special rule for certain ownership changes.

yThe enhanced IRC Section 179 expensing election.

yThe first-year depreciation deduction allowed for new luxury autos or certain passenger automobiles acquired and placed in service in 2010 through 2018.

yThe qualified small business stock deferral and gain exclusions under IRC Section 1045 and IRC Section 1202.

yThe IRS Notice 2008-83 relating to the treatment of deductions under IRC Section 382(h) following an ownership change.

yIRC Section 168(k) relating to the bonus depreciation deduction for certain assets.

yThe decreased holding period for built-in gains.

yThe decreased estimated tax payments for certain small businesses.

yThe treatment of the loss from the sale or exchange of certain preferred stock (of Fannie Mae or Freddie Mac).

yThe percentage depletion deduction, which may not exceed 65% of the taxpayer’s taxable income, is restricted to 100% of the net income derived from the oil or gas well property.

yExclusion from gross income of certain federal subsidies for prescription drug plans under IRC Section 139A.

yCertain environmental remediation expenditures that would otherwise be chargeable to capital accounts may be expensed and taken as a deduction in the year the expense was paid or incurred.

yDeduction for corporate donation of scientific property and computer technology.

yDecreased capital gains tax rate.

yCertain special tax rules relating to ESOPs will not apply with respect to S corporation stock held by the ESOP. These include rules relating to certain contributions to ESOPs, the deduction for dividends paid on employer securities, and the rollover of gain on the sale of stock to an ESOP. See IRC Sections 404(a)(9) and 404(k) for more information.

yThe treatment of Subpart F income.

The above lists are not intended to be all-inclusive of the federal and state conformities and differences. For more information, refer to the R&TC.

Records Maintenance Requirements Any taxpayer filing on a water’s-edge or worldwide basis is required to keep and maintain records and make the following available upon request:

yAny records needed to determine the correct treatment of items reported on the worldwide or water’s-edge combined report for purposes of determining the income attributable to California.

yAny records needed to determine the treatment of items as nonbusiness or business income.

yAny records needed to determine the apportionment factor.

yDocuments and information needed to determine the attribution of income to the U.S. or foreign jurisdictions under Section 482, Sections under Subchapter N of Chapter 1, or other similar provisions of the IRC.

See R&TC Section 19141.6 and the related regulations for more information. An

S corporation may be required to authorize an agent, through a Power of Attorney (POA), to act on its behalf in response to requests for information or records pursuant to R&TC Section 19504. For more information, go to ftb.ca.gov/poa.

The penalty for not maintaining the above required records is $10,000 for each taxable year for which the failure applies. In addition, if the failure continues for more than 90 days after the FTB notifies the S corporation of the failure, a penalty of $10,000 may be assessed for each additional 30 day period of continued failure. See General Information M, Penalties, for more information.

General Information

Form 100S is used if a corporation has elected to be a small business corporation (S corporation).

All federal S corporations subject to California laws must file Form 100S and pay the greater of the minimum franchise tax or the 1.5% income or franchise tax. The tax rate for financial S corporations is 3.5%.

The taxable income of the S corporation is calculated two different ways for two different purposes. First, it is calculated in the same manner as for C corporations, with certain modifications, for purposes of computing the 1.5% income or franchise tax. Second, it is calculated using federal rules for the pass through of income and deductions, etc. for purposes of pass through to the shareholders.

A corporation that makes a valid election to be treated as an S corporation is not allowed to be included in a combined report of a unitary group, except as provided by R&TC Section 23801(d)(1).

When Completing the Form 100S

yUse black or blue ink on the tax return sent to the FTB.

yPrint name and address (in CAPITAL LETTERS).

yWhen a domestic S corporation files the first California tax return, the fiscal year beginning date must be the date the S corporation is incorporated.

yRound cents to the nearest whole dollar. For example, round $50.50 up to $51 or round $25.49 down to $25.

yEnter all types of payments (overpayment from prior year, estimated tax, nonresident tax, etc.) made for the 2018 taxable year on the applicable line.

yWhen making a payment with a check or money order, enclose but do not staple the payment to the front of the tax return.

yAssemble the corporation return in the following order: Form 100S, Schedule R, (if required), supporting schedules, a copy of federal return (if required), and form FTB 5806, Underpayment of Estimated Tax by Corporations, (if required). Do not use staples or other permanent bindings to assemble the tax return.

A Franchise or Income Tax

Corporation Franchise Tax

Entities subject to the corporation minimum franchise tax include all S corporations that meet any of the following:

yIncorporated or organized in California.

yQualified or registered to do business in California.

yDoing business in California, whether or not incorporated, organized, qualified, or registered under California law.

The minimum franchise tax must be paid by corporations incorporated in California or qualified or registered under California law whether the S corporation is active, inactive,

not doing business, or operates at a loss. See General Information B, Tax Rate and Minimum Franchise Tax, for more information.

The measured franchise tax is imposed on S corporations doing business in California and is measured by the income of the current taxable year for the privilege of doing business in that taxable year.

A taxpayer is “doing business” if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if any of the following conditions is satisfied:

yThe taxpayer is organized or commercially domiciled in California.

yThe sales, as defined in R&TC

Section 25120(e) or (f), of the taxpayer in California, including sales by the taxpayer’s agents and independent contractors, exceed the lesser of $583,867 or 25% of the taxpayer’s total sales.

yThe real property and tangible personal property of the taxpayer in California exceed the lesser of $58,387 or 25% of the taxpayer’s total real property and tangible personal property.

yThe amount paid in California by the taxpayer for compensation, as defined in R&TC Section 25120(c), exceeds the lesser of $58,387 or 25% of the total compensation paid by the taxpayer.

In determining the amount of the taxpayer’s sales, property, and payroll for doing business purposes, include the taxpayer’s pro rata share of amounts from partnerships and

S corporations. All S corporations complete Schedule K-1 (100S), Table 2, Item C to report the shareholder’s distributive share of property, payroll and sales total within California. For more information, see R&TC Section 23101 or go to ftb.ca.gov and search for doing business.

An S corporation incorporated in California, but not doing business in this state, is not subject to the measured franchise tax. However, careful attention should be given to the term “doing business.” It is not necessary that the S corporation conducts business or engages in transactions within the state on a regular basis. Even an isolated transaction during the taxable year may be enough to cause the S corporation to be “doing business.”

Also, when an S corporation is either a general partner of a partnership or a member of a Limited Liability Company (LLC) that is “doing business” in California, the S corporation is also considered to be “doing business” in California.

Corporation Income Tax

The corporation income tax is imposed on all S corporations that derive income from sources within California but are not doing business in California.

For purposes of the corporation income tax, the term “corporation” is not limited to incorporated entities, but also includes the following:

yAssociations.

yMassachusetts or business trusts.

yReal estate investment trusts.

yOther business entities classified as associations under Cal. Code Regs., tit. 18 sections 23038(b)-1 through 23038(b)-3.

B Tax Rate and Minimum Franchise Tax

The following tax rates apply to S corporations subject to either the corporation franchise tax or the corporation income tax.

yS corporations . . . . . . . . . . . . . . . . . . 1.5%

yFinancial S corporations . . . . . . . . . . . 3.5%

yBuilt-in gains and excess net passive income . . . . . . . . . . . . . . . . . . . . . . . 8.84%

See R&TC Section 23186, General Information J, Built-In Gains, and General Information S, Excess Net Passive Investment Income, for more information.

Minimum Franchise Tax

All S corporations subject to the corporation franchise tax and any S corporation doing business in California must file Form 100S and pay at least the minimum franchise tax as required by law. The minimum franchise tax is $800 and must be paid whether the

S corporation is active, inactive, operates at a loss, or files a return for a short period of less than 12 months.

A corporation that incorporated or qualified through the California Secretary of State (SOS) to do business in California is not subject to the minimum franchise tax for its first taxable year and will compute its tax liability by multiplying its state net income by the appropriate tax rate. The corporation will become subject to minimum franchise tax beginning in its second taxable year. This does not apply to qualified Subchapter S subsidiaries or corporations that are not qualified by the California SOS, or reorganize solely to avoid payment of the minimum franchise tax.

There is no minimum franchise tax for the following entities:

yCorporations that are not incorporated in California, not qualified under the laws of California, and are not doing business in California even though they derive income from California sources. However, if corporations meet the sale, property, or payroll threshold for “doing business” under R&TC Section 23101(b), corporations may be subject to the minimum franchise tax. For more information regarding “doing business,” see General Information A, Franchise or Income Tax; refer to R&TC Section 23101(b); get FTB Pub. 1050, Application and Interpretation of Public Law 86-272; or FTB Pub. 1060, Guide for Corporations Starting Business in California.

yCorporations with no income other than qualified health care service plan income

that is excluded from gross income under R&TC Section 24330 for the taxable year.

yCredit unions.

yExempt homeowners’ associations.

yExempt political organizations.

yQualified non-profit farm cooperative associations.

yExempt organizations.

yCorporations that are not incorporated under the laws of California; whose sole activities in California are engaging in convention and trade show activities for seven or fewer days during the taxable year; and do not derive more than $10,000 of gross income reportable to California during the taxable year. These S corporations are not “doing business” in California. For more information, get FTB Pub. 1060.

yNewly formed or qualified corporations filing an initial return.

Alternative Minimum Tax

S corporations are not subject to the alternative minimum tax.

C Elections and Terminations

Elections

Corporations that elect federal S corporation status and have a California filing requirement are deemed to have made a California

S election effective on the same date as the federal S election.

Terminations

Terminating the taxpayer’s federal S election simultaneously terminates its California

S election.

If the taxpayer terminates its S corporation status, short-period returns are required for the S corporation short year and the C corporation short year, if applicable.

D Accounting Period and Method

The taxable year of the S corporation must not be different from the taxable year used for federal purposes, unless initiated or approved by the FTB (R&TC Section 24632).

A change in accounting method requires consent from the FTB. However, an

S corporation that obtains federal approval to change its accounting method, or that is permitted or required by federal law to make a change in its accounting method without prior approval, and does so, is deemed to have the FTB’s approval if: (1) the S corporation files a timely Form 100S consistent with the change for the first taxable year the change is effective for federal purposes; and (2) the change

is consistent with California law. A copy of federal Form 3115, Application for Change in Accounting Method, and a copy of the federal consent to the change must be attached to Form 100S for the first taxable year the change becomes effective. Get FTB Notice 2000-8

for more information. The FTB may modify requested changes if the adjustments would distort income for California purposes.

California follows the provisions of Revenue Procedure 2016-29, which updates the procedures for a change of accounting method involving previously unclaimed, but allowable depreciation or amortization deductions.

E When to File

File Form 100S by the 15th day of the 3rd month after the close of the taxable year unless the return is for a short-period as required under R&TC Section 24634. Generally, the due date of a short-period return is the same as the due date of the federal short-period return. See R&TC Section 18601(c) for the due date of the short-period return.

When the due date falls on a weekend or holiday, the deadline to file and pay without penalty is extended to the next business day.

For information on final returns, see General Information O, Dissolution/Withdrawal, and General Information P, Ceasing Business.

If an S corporation converts during its taxable year to an LLC or limited partnership (LP) under state law, then generally two short-period California returns must be filed (one short-period return for the S corporation and another short-period return for the LLC or LP).

The corporate status and taxable year of the LLC or LP will not terminate and only a single return Form 100S is required if:

ythe LLC or LP files a federal election to be classified as an association taxable as an S corporation effective as of the conversion date,

ythe conversion otherwise qualifies as a reorganization under IRC Section 368(a)(1)(F), and

ythe LLC or LP satisfies the statutory requirements to be an S corporation.

F Extension of Time to File

If an S corporation cannot file its California tax return by the 15th day of the 3rd month after the close of the taxable year, it may file on or before the 15th day of the 9th month without filing a written request for an extension. Get FTB Notice 2016-04 for more information.

If the S corporation is suspended on or after the original due date, the automatic extension will not apply.

An automatic extension does not extend the time for payment. The full amount of tax must be paid by the original due date of Form 100S. If there is an unpaid tax liability on the original due date, complete form FTB 3539, Payment for Automatic Extension for Corporations and Exempt Organizations, included in this booklet, and send it with the payment by the original due date of the Form 100S.

If the S corporation expects an NOL in the 2019 taxable year, it can file form FTB 3593 to extend the time for payment of tax for the immediately preceding 2018 taxable year. Get form FTB 3593 for more information.

When the due date falls on a weekend or holiday, the deadline to file and pay without penalty is extended to the next business day.

If the S corporation must pay its tax liability electronically, all payments must be remitted by Electronic Fund Transfer (EFT), EFW, Web Pay, or credit card to avoid penalties. Do not send form FTB 3539.

G Electronic Payments

Electronic Funds Transfer

Corporations or exempt organizations remitting an estimated tax payment or extension payment in excess of $20,000 or having a total tax liability in excess of $80,000 must remit all payments through EFT. Once a corporation meets the threshold, all subsequent payments regardless of amount, tax type, or taxable year must be remitted electronically to avoid the 10% non-compliance penalty. The first payment that would trigger the mandatory EFT requirement does not have to be made electronically. Corporations required to remit payments electronically may use EFW, Web Pay, or credit card and be considered in compliance with that requirement. The FTB notifies corporations or exempt organizations that are subject to this requirement. Those that do not meet these requirements may participate on a voluntary basis. If the corporation pays electronically, complete the form FTB 3539 worksheet for its records.

Do not mail the payment voucher. For more information, go to ftb.ca.gov and search for eft or call 916.845.4025.

Electronic Funds Withdrawal

S corporations can make an estimated tax or extension payment using tax preparation software. Check with the software provider to determine if they support EFW for estimated tax or extension payments.

Web Pay

Corporations can make payments online using Web Pay for Businesses. Corporations can make an immediate payment or schedule payments up to a year in advance. Go to ftb.ca.gov/pay.

Credit Card

Corporations can use Discover, MasterCard, Visa or American Express Card to pay business taxes. Go to oficialpayments.com. Official Payments Corp. charges a convenience fee for using this service. Do not file form FTB 3539.

H Where to File

Payments

If a tax is due and the corporation is not required to make the payment electronically (by EFT, EFW, Web Pay, or credit card):

yMail Form 100S with payment to:

FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0501

ye-Filed returns: Mail form FTB 3586, Payment Voucher for Corporations and

Exempt Organizations e-filed Returns, with payment to:

FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0531

Using black or blue ink, make the check or money order payable to the “Franchise Tax Board.” Write the California corporation number and “2018 Form 100S” on the check or money order.

Make all checks or money orders payable in U.S. dollars and drawn against a U.S. financial institution.

Do not attach a copy of the return with the balance due payment if the S corporation already filed/e-filed a return for the same taxable year.

Refunds

yMail Form 100S requesting a refund to:

FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0500

Return Without Payment or Paid

Electronically

yMail Form 100S without a payment or paid by EFT, EFW, Web Pay, or credit card to:

FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0500

Private Delivery Services

California law conforms to federal law regarding the use of certain designated private delivery services to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. See the instructions for federal Form 1120S for a list of designated delivery services. If a private delivery service is used, address the return to:

FRANCHISE TAX BOARD

SACRAMENTO CA 95827

Private delivery services cannot deliver items to PO boxes. If using one of these services to mail any item to the FTB, do not use an FTB PO box.

INet Income Computation

The computation of net income from trade or business activities generally follows the determination of taxable income as provided in the IRC. However, there are differences that must be taken into account when completing Form 100S. There are two ways to complete Form 100S, the federal reconciliation method or the California computation method.

1.Federal Reconciliation Method

a.Transfer the information from the federal Form 1120S, Page 1, to Form 100S, Side 4, Schedule F, Computation of Trade or Business Income, and attach

a copy of the federal return with all supporting schedules.

b.Enter the amount of federal ordinary income (loss) from trade or business

activities before any NOL and special deductions on Form 100S, Side 1, line 1.

c.Enter the state adjustments (including any adjustments necessary to report items not included in ordinary trade or business income or loss) on Form 100S, Side 1 and Side 2, line 2 through

line 13, to arrive at net income (loss) after state adjustments, Form 100S, Side 2, line 14.

2.Schedule F – California Computation Method

If the S corporation has no federal filing requirement, or if the S corporation maintains separate records for state purposes, complete Form 100S, Side 4, Schedule F, to determine state ordinary income. If ordinary income is computed under California laws, generally no state adjustments are necessary. Transfer the amount from Schedule F, line 22, to Form 100S, Side 1, line 1. Complete Form 100S, Side 1 and Side 2, line 2 through line 13, only if applicable.

See Specific Line Instructions for more information.

Regardless of the net income computation method used, the S corporation must attach any form, schedule, or supporting document referred to on the return, schedules, or forms filed with the FTB.

Substitution of Federal Schedules

S corporations may not substitute federal schedules for California schedules.

J Built-In Gains

When a C corporation elects to be an

S corporation, certain items of gain or loss recognized in S corporation years are subject to the C corporation 8.84% tax rate instead of the S corporation 1.5% tax rate (financial S corporations add 2%).

Built-In Gains Under Current IRC

Section 1374

For those S corporations that made the initial federal S election after December 31, 1986, certain income items reported by the

S corporation are taxed at 8.84% (or the financial C corporation tax rate). This provision applies for a period of ten years following the C corporation’s election to become an S corporation. The amount of built-in gain that is taxed at 8.84% (or the financial C corporation tax rate) is the excess of recognized built-in gains over recognized built-in losses, limited by taxable income as determined under IRC Section 1374(d)(2)(A). The following items are treated as built-in gains subject to this tax:

yAccounts receivable of cash basis taxpayers from C corporation years.

yLong-term contract deferred income from C corporation years.

yDeferred income from installment sales made in C corporation years.

yRecapture of depreciation from C corporation years.

yIncome from unreplaced last-in, first-out (LIFO) inventory from C corporation years.

yAny other income item that is attributable to C corporation years.

These are just a few of the examples. This list is not intended to be all inclusive.

For Apportioning Corporations Only:

All recognized built-in gains and all recognized built-in losses are apportioned and allocated to California according to the current year Schedule R.

K Estimated Tax

Every S corporation must pay estimated tax using Form 100-ES, Corporation Estimated Tax.

Corporations are required to pay the following percentages of the estimated tax liability during the taxable year:

y30% for the first required installment

y40% for the second required installment

yNo estimated tax payment is required for the third installment

y30% for the fourth required installment

For exceptions and prior year’s information, get Form 100-ES.

Estimated tax is generally due and payable in four installments as follows:

yThe 1st payment is due on the 15th day of the 4th month of the taxable year. This payment may not be less than the minimum franchise tax plus QSub annual tax, if applicable.

yThe 2nd, 3rd, and 4th installments are due and payable on the 15th day of the 6th, 9th, and 12th months, respectively, of the taxable year.

If no amount is due, do not mail Form 100-ES.

California law conforms to the federal expanded annualization periods for the computation of estimate payments. The applicable percentage for estimate basis is 100%.

Get the instructions for Form 100-ES for more information.

If the corporation must pay its tax liability electronically, all estimate payments due must be remitted by EFT, EFW, Web Pay, or credit card to avoid the EFT penalty. See General Information G, Electronic Payments, for more information.

L New/Commencing

S Corporations

An S corporation is required to pay measured tax instead of minimum tax for the first taxable year if the corporation incorporated or registered through the California SOS. For more information, see General Information B, Tax Rate and Minimum Franchise Tax, or get FTB Pub. 1060.

M Penalties

Failure to File a Timely Return

Any corporation that fails to file Form 100S on or before the extended due date is assessed a delinquent filing penalty. The delinquent filing penalty is computed at 5% of the tax due, after allowing for timely payments, for every month that the return is late, up to a maximum of 25%. If the S corporation does not file its return by the extended due date, the automatic extension will not apply and the late filing penalty will be assessed from the original due date of the return. See R&TC Sections 19131 and 23772 for more information.

Unless failure is due to reasonable cause, a penalty will be assessed against the

S corporation if it is required to file an

S corporation return and one of the following occurs:

yThe S corporation fails to file the tax return by the due date, including extensions.

yThe S corporation files a return that fails to show all of the information required pursuant to R&TC Section 18601.

The amount of the penalty for each month, or part of a month (for a maximum of 12 months) that the failure continues, is $18 multiplied

by the total number of shareholders in the S corporation during any part of the taxable year for which the return is due. See R&TC Section 19172.5 for more information.

Failure to Pay Total Tax by the Due Date

Any S corporation that fails to pay the total tax shown on Form 100S by the original due date is assessed a penalty. The penalty is 5% of the unpaid tax, plus 0.5% for each month, or part of the month (not to exceed 40 months) the tax remains unpaid. This penalty may not exceed 25% of the unpaid tax. See R&TC Section 19132 for more information.

The FTB may waive the late payment penalty based on reasonable cause. Reasonable cause is presumed when 90% of the tax shown

on the return, but not less than minimum franchise tax if applicable, is paid by the original due date of the return. However, the imposition of interest is mandatory.

Corporations that meet the requirements for filing form FTB 3593 may extend the time for payment of taxes and are not subject to late payment penalties. For more information, get form FTB 3593.

If an S corporation is subject to both the penalty for failure to file a timely return and the penalty for failure to pay the total tax by the due date, a combination of the two penalties may be assessed, but the total will not exceed 25% of the unpaid tax.

Underpayment of Estimated Tax

Any S corporation that fails to pay, pays late, or underpays an installment of estimated tax is assessed a penalty. The penalty is a percentage of the underpayment of estimated tax for the period from the date the installment was due until the date it is paid, or until the original due

date of the tax return, which ever is earlier. Get form FTB 5806 to determine both the amount of underpayment and the amount of penalty.

The underpayment of estimated tax penalty shall not apply to the extent the underpayment of an installment was created or increased by any provision of law that is chaptered during and operative for the taxable year of the underpayment.

See R&TC Sections 19142, 19144, 19145, 19147 through 19151, and 19161 for more information.

If the S corporation uses Exception B or Exception C on form FTB 5806 to compute or eliminate any of the required installments, form FTB 5806 must be attached to the back of Form 100S (after all schedules and federal return) and the box on Form 100S, Side 2, line 42b, should be checked.

Large Corporate Understatement Penalty (LCUP)

Corporations are subject to the LCUP for the understatement of tax if that understatement exceeds the greater of:

y$1 million, or

y20% of the tax shown on an original or amended return filed on or before the original or extended due date of the return for the taxable year.

The amount of the penalty is equal to 20% of the understatement of tax. See R&TC Section 19138 for exceptions to the LCUP. For more information, go to ftb.ca.gov and search for lcup.

EFT Penalty

If the S corporation must pay its tax liability electronically, all payments must be remitted by EFT, EFW, Web Pay or credit card to avoid the penalty. The penalty is 10% of the amount not paid electronically. See R&TC Section 19011 and General Information G, Electronic Payments, for more information.

Information Reporting Penalties

U.S. corporations that have an ownership interest (directly or indirectly) in a foreign corporation and were required to file federal Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; or federal Form 8975, Country-by-Country Report, and accompanying Schedule A (8975), Tax Jurisdiction and Constituent Entity Information with the federal return, must attach a copy(ies) to the California return. The penalty for failure to include a copy of federal Form(s) 5471, or federal Form 8975 and accompanying Schedule A (8975), as required, is $1,000 per required form for each year the failure occurs. The penalty will not

be assessed if the copy of the information required to be filed with the IRS was not attached to the taxpayer’s original return and the taxpayer provides a copy of the form(s) within 90 days of request from the FTB and the taxpayer agrees to attach a copy(ies) of federal Form 5471 or federal Form 8975 and accompanying Schedule A (8975) to all original returns filed for subsequent years. See R&TC

Section 19141.2 for more information.

Note: Foreign insurance companies that file as domestic companies are exempt from the requirement of filing federal Form 8975 and accompanying Schedule A (8975).

Certain domestic corporations that are 25% or more foreign-owned and foreign corporations engaged in a U.S. trade or business must attach a copy(ies) of the federal Form(s) 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, to Form 100S. The penalty for failing to include a copy of federal Form(s) 5472, as required, is $10,000 per required form for each year the failure occurs. See R&TC Section 19141.5 for more information.

If the S corporation does not file its

Form 100S by the due date or extended due date, whichever is later, copy(ies) of federal Form(s) 5472 must still be filed on time or the penalty will be imposed. Attach a cover letter to the copy(ies) indicating the taxpayer’s name, California corporation number, and taxable year. Mail to the same address used for returns without payments. See General Information H, Where to File, for more information. When the S corporation files Form 100S, also attach copy(ies) of the federal Form(s) 5472.

Record Maintenance Penalty

The penalty for failure to maintain certain records is $10,000 for each taxable year for which the failure applies. In addition, if the failure continues for more than 90 days after the FTB notifies the S corporation of the failure, in general, a penalty of $10,000 may be assessed for each additional 30-day period of continued failure. There is no maximum amount of penalty that may be assessed.

See Records Maintenance Requirements on page 6 for a discussion of the records required to be maintained. See R&TC Section 19141.6 and the related regulations for more information.

Accuracy and Fraud Related Penalties California conforms to IRC Sections 6662 through 6665 that authorize the imposition of an accuracy-related penalty equal to 20% of the related underpayment and the imposition of a fraud penalty equal to 75% of the related underpayment. See R&TC Section 19164 for more information.

California Secretary of State (SOS) Penalty The California Corporations Code requires the FTB to assess a penalty for failure to file an annual Statement of Information with the California SOS. For more information, see R&TC Section 19141, or contact:

SECRETARY OF STATE

STATEMENT OF INFORMATION UNIT ATTENTION: PENALTIES

PO BOX 944230 SACRAMENTO CA 94244-2300

Telephone: 916.657.5448

Other Penalties

Other penalties may be imposed for a payment returned for insufficient funds,

foreign corporations operating while forfeited or without qualifying to do business in California, and domestic corporations operating while suspended in California. See R&TC Sections 19134 and 19135 for more information.

N Interest

Interest is due and payable on any tax due if not paid by the original due date of Form 100S. Interest is also due on some penalties. The automatic extension of time to file Form 100S does not stop interest from accruing. California follows federal rules for the calculation

of interest. Get FTB Pub. 1138, Business Entity Refund/Billing Information, for more information.

O Dissolution/Withdrawal

The S corporation must fill in the applicable box on Form 100S, Side 1, Question A1,

if dissolving, merging, or withdrawing. Enter the date the S corporation filed/will file the documents for dissolution with the California SOS.

The franchise tax for the period in which the S corporation formally dissolves or withdraws is measured by the income of the taxable year in which it ceased doing business in California, unless such income has already been taxed at the rate prescribed for the taxable year of dissolution or withdrawal.

An S corporation that is a successor to a corporation that commenced doing business in California before January 1, 1972, is allowed a credit that may be refunded in the year of dissolution or withdrawal. The amount of the refundable credit is the difference between the minimum franchise tax for the corporation’s first full 12 months of doing business and the total tax paid for the same period.

To claim this credit, enter the amount on Form 100S, Side 2, line 33. To the left of line 33, write “Dissolving/ Withdrawing” or include it according to your software’s instructions.

The tax return for the final taxable period is due on or before the 15th day of the 3rd full month after the month during which the S corporation withdrew or stops doing business in California.

Corporations are subject to income tax or franchise tax for the final taxable period. Corporations that file a final franchise tax return must pay at least the minimum franchise tax as specified in R&TC Section 23153.

The minimum franchise tax will not be assessed after the taxable year for which the final tax return is filed, if a corporation meets all of the following requirements:

yThe corporation files a timely inal franchise tax return for the preceding taxable year, including extension. The corporation must be in good standing to have an extension to file.

yThe corporation did not do business in California after the final taxable year.