Franchise Tax Paid

[Maria]

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]

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.

[veritas]

Check the settings

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

[veritas]

Interesting - maybe not

This may apply see Charles Schwab Corporation VS Commissioner.

9th circuit 8/7/07.

[Maria]

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.