Franchise Tax Paid

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  • Maria
    Member
    • Feb 2007
    • 67

    #1

    Franchise Tax Paid

    Hello,

    I need an urgent help. I am so, so confused again.

    We are in California. In California, a corporation (regardless C or S) has to pay a min tax of $800 as a license fee. For example, for the year 2006, $800 is due 4/15/06. If you have income, you tax could be more than $800.

    I am doing a C corporation return, 2005 state tax was $800, 2006 state tax was $1684. My manager told me that on 2006 return, I deduct 2005 state tax, not 2006, it is always a year behind. However, when I prepared 2005, I deducted 2005 $800 already.

    Why is that, I am so curious, this is accrual basis, the state tax incurred in 2006, why can't it be deducted?

    Thanks a lot,

    Maria
  • Golden Rocket
    Senior Member
    • Jul 2007
    • 519

    #2
    Franchise Tax

    Maria, the Franchise Tax is deductible in the year to which it applies. If an accrual-basis taxpayer pays a 2006 Franchise tax in 2007, the taxpayer should be able to deduct it as an expense in 2006.

    However, in most cases, the Franchise tax is a deduction for federal purposes, and the federal tax is a deduction for state purposes. This leads to a cyclical calculation which cannot balance the two if both are accrued. Your supervisor may be avoiding this rather than telling you it is non-deductible.

    I believe the double accrual can actually be solved by a pure mathematician under a limiting process in calculus. But I've never solved it, and haven't heard any solution that works.

    Comment

    • veritas
      Senior Member
      • Dec 2005
      • 3290

      #3
      Check the settings

      for your software. It should be able to accrue the taxes appropriately.

      Comment

      • veritas
        Senior Member
        • Dec 2005
        • 3290

        #4
        Interesting - maybe not

        This may apply see Charles Schwab Corporation VS Commissioner.

        9th circuit 8/7/07.

        Comment

        • Maria
          Member
          • Feb 2007
          • 67

          #5
          Thanks

          I took her answer, just as you said, it is hard to balance it.

          The system always makes me confused on this, so I supress the function on every single return.

          Thanks a lot.

          Comment

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