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Gross Receipts tax for California LLC - Disregarded Entity

February 07, 2017 • Mark Lianides • Log In to Post Comments

I have a client with an LLC which has rental property inside.  We treat the LLC as a disregarded entity and the rentals are reported on Schedule E of his 1040.  He sold one property.  For the purposes of calculating the gross receipts tax, should the gain be included from the sale of rental?  It doesn't make sense that the sale proceeds themselves would be used.  Not sure whether the gain should be as well - would the gain be considered a "gross receipts on your normal product or service"?  


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Hi Mark,

See FTB Legal Ruling 2016-01 and Spidell's article "Calculating the LLC fee for real estate dealders" at https://www.caltax.com/research/california-taxletter/2016/08/calculating-the-llc-fee-for-real-estate-dealers.

So it sounds like the gain goes into the calculation of gross receipts tax.  The area I am finding ambiguous is the examples don't quite touch on my situaton (I think).  The Spidell article and FTB Legal Ruling focus on comparing "business" or "dealer" versus "invester" or "a nondealer who buys and follows with a sale of the property".  My client merely rents properties and he decided in 2016 to sell one.  If I project what is being said by Spidell and the Legal Ruling I would generalize them by saying that if you are a dealer you report the sales proceeds, but if you are less than that, you report the gain.  Am I reading that right?  My client is a landlord so he falls into the latter category.

Mark, I think you are correct that the ruling only relates to situations in which the property is held for sale in the ordinary course of the taxpayer's trade or business.  It's unclear whether the FTB will apply their reasoning beyond the dealer situation, although we feel they have a weaker argument in that situation.

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