LLCs and small biz: highlights from CalCPA's TaxTalk Listserve.

Exchange accommodators frequently use single member LLCs to transfer title. Since SMLLCs are a transparent entity, one would think that the transfer of ownership would be considered the same as the transfer of title.

However, in at least one case, the FTB is attempting to invalidate a reverse Sec. 1031 exchange on the premise that the recipient received an SMLLC interest and not title to property.

One TaxTalk participant, a partner in a large local firm in Los Angeles, said that he hasn't seen the FTB accept a delayed (aka Starker) exchange (either forward or reverse) in the past three years.

A Common LLC Change of Ownership Problem

When an LLC is required to file two tax returns for the same year due to a change of ownership of more than 50 percent, does the client have to pay two separate gross receipt fees for the two short-year period periods entirely within the same year?

The answer is yes. According to Form 568 instructions, two Form 568s must be filed, one for each period.

However, that sets up the LLC for correspondence from the FTB because the total LLC tax paid between the two forms will be less than it would have been for just one Form 568.

The instructions to Form 568 also state that the FTB may aggregate the receipts of commonly controlled LLCs, which might cause the FTB to suspect tax avoidance (i.e., breaking up the entity into several small LLCs to reduce the LLC fee). The instructions define "commonly controlled" as more than 50 percent of the capital interest or profit interest of the taxpayer and any other LLC or partnership by the same persons.

Unregistered Tax Preparers--FYI

Tax preparers who aren't CPAs, attorneys or enrolled agents (or aren't employed by a member of one of those categories) must register with the California Tax Education Council, an entity created by the California Legislature. The total number of registrants is about 40,100.

The FTB has been walking the street looking for unregistered preparers. The ones they find are told how to get registered, and are notified that there is a $2,500 penalty for being unregistered. The penalty is waived if they register within 90 days. If they don't register, and still are doing tax returns a year later, the penalty is $5,000.

From January 2006 to May 2006, the FTB issued 21 $2,500 notices. Eleven registered, one died, two are no longer doing returns, one disappeared and six received $5,000 penalties.

The FTB made 715 site visits in January 2007. Twenty-four stopped preparing, 54 paid $2,500 penalties and 25 got registered in 90 days.

The FTB also mailed letters to 1,400 preparers doing fewer than 100 returns, advising them that they needed to register. Alas, several of the letters were erroneously sent to CPAs, attorneys or EAs.

There was talk of notifying IRS as to which preparers paid the penalties, with the thought that auditing the returns they prepared might be fruitful.

California Codes--FYI

The latest version of the codes which comprise the statutes of the state of California can be found at www.leginfo.ca.gov/calaw.html.

EDD Small Business Employer Advisory Committee (SBEAC)

Jim Counts represents CalCPA's Committee on Taxation and recently compiled extensive notes for the COT after a meeting with the Employee Development Department.

Marty Keller, the governor's small business advocate, stated that he can look into any issues affecting small businesses involving any California state agency. His agency has a website at www.sba.ca.gov.

He also has a small business advisory panel. Anyone who is interested in small business and wishes to join, or has other questions, may contact him at [e-mail]. The panel meets every other month.

Under California law, 25 percent of each agency's purchases should go to small business and 3 percent should go to businesses with disabled owners. For this purpose, a small business is defined as 100 or fewer employees or an average of $12 million in sales (or less) over the past three years.

Employee Training Fund (ETP)

The ETP is actively seeking small businesses that have training needs and makes it easy for them to apply and received funds for training.

The program for small businesses (fewer than 100 employees) will pay $22 per hour, per employee for training, as long as the employees receive the state normal minimum hourly rate or more.

Once the employee finishes the training, the employer is required to pay a certain minimum wage amount to the employee. This wage amount depends on the county the employee is working in, and if the employee is a new hire or a retrainee. Those amounts are between $10.13 to $13.51 per hour. There also is a requirement that that worker be employed by the employer for 90 days after the training.

For more information, go to www.etp.ca.gov.

Thanks to the following for their contributions to this column: Jim Counts, CPA; Kip Dellinger, CPA; Ralph H. Weintraub, CPA and Kitty Wright, Ph.D., CPA, JD.

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at [e-mail].

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By Leonard W. Williams, CPA