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Clarification for Out-of-State Entities Doing Business in California on Property Ownership Threshold

by | Aug 5, 2022 | Appeals, New Laws, Office of Tax Appeals |

In a Pending Precedential Opinion by the California Office of Tax Appeals (OTA), the OTA clarified that in determining whether an out-of-state LLC doing business in California and therefore subject to the annual tax each year, the determination based on the property threshold test is based on the entity’s profit interest, and not its capital interest.

This is significant because out-of-state entities doing business in California may have a significant capital interest in property, but may nevertheless have years with a very low profit sharing interest.  Under the OTA’s Pending Precedential Opinion, that would relieve such taxpayers from paying tax during years when the profit sharing interest did not meet the statutory threshold.

With regard to the property threshold, California Revenue & Taxation Code (R&TC) section 23101(b)(3) provides that, for taxable years beginning on or after January 1, 2011, a taxpayer is doing business in California for a taxable year if the real property and tangible personal property of the taxpayer in this state exceed the lesser of fifty thousand dollars ($50,000) or 25 percent of the taxpayer’s total real property and tangible personal property.  The threshold amounts, as adjusted for inflation each year. In determining whether a taxpayer has exceeded the California property threshold amount, the taxpayer must take into account its pro rata or distributive share of California property owned by pass-through entities in which it held an interest. (R&TC, § 23101(d).)

To read the complete Pending Precedential Opinion, click here.


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