What's the F.T.B.?

F.T.B., of course, stands for the Franchise Tax Board -- the California taxing authority.

Why do we have to deal with them?

California is unique among all states, in that it:

  1. considers ALL corporations taxable by default and
  2. charges ALL corporations an $800 minimum annual corporate tax (even if inactive).
The way around this is to receive tax-exempt status from the Franchise Tax Board. (IRS tax exemption does NOT count here.) Daunting, no?

How do I become tax-exempt?
A few years ago the F.T.B. simplified the process of becoming tax-exempt if you're already exempt under Section 501(c)(3).

Once you have I.R.S. exemption, you need to file a simple, one-page form with the F.T.B. -- Form 3500a -- and you'll be automatically recognized as state-tax exempt. (Be sure to include your I.R.S. letter with this form.)

(Note: the instructions to Form 3500a include a sample budget. However, the instructions also clarify that submitting the budget is optional, to help the F.T.B. classify your account.)

(If you're not a 501(c)(3) organization, file Form 3500 instead.)
Checking your status
In February 2010 the F.T.B. "went live" on the Web with a list of ALL tax-exempt organizations in California.




The list contains information about whether the entity is "active" or "suspended" with the F.T.B. and the Secretary of State.

Here's a link to the exempt organization list, which contains over 230,000 entries and is updated monthly (most recently on January 23rd, 2012).
                                                            
Filing requirement
Don't forget to file your annual Form 199 if your gross receipts average $25K or more. Click here to find the averaging formula.

New Filing Rules for small organizations starting January 1, 2011.
Click here to file the new Form 199N (e-postcard), which must be filed every year by most small organizations.
Check this portion of the F.T.B. Web site for the rules, which are similar to the IRS's annual electronic postcard for small organizations.

To resolve delinquency
In my experience, the F.T.B. is the most phone-accessible state agency to determine the cause of your non-compliant status. Here's how to reach them:

* Call 800-852-5711 (toll-free, but be prepared to wait)
* or call the Exempt Unit: 916-845-4171.

Money-saving hint
If your delinquency goes back several years, the F.T.B. may tell you that you owe thousands of dollars in taxes, penalties and interest, BUT I NEVER PAY THEM.

Why? Because as an exempt entity you're not required to pay corporate taxes. I've found that restoration of status takes place quickly as long as you file all the required forms.

Exception to the above: there's a late-filing penalty for Form 199 of up to $40 per year. I always pay that and other smaller fees.

WARNING: The F.T.B. is now retroactively REVOKING exemption if an organization indicates to the F.T.B., in response to an inquiry, that it has been inactive. I recommend that all organizations show at least a small amount of annual income and continue a minimal amount of activity, such as searching for funding or discussing future plans, in order to keep their state tax exemption in effect.