California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 1 - General Provisions and Definitions › Article 2 - Definitions › Section 23038(b)-3 - Classification of Certain Business Entities

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) In general. A business entity that is not
					 classified as a corporation under Reg. §
											23038(b) -
					 2(b)(1), (3), (7), or
					 (8) (an eligible entity) can elect its
					 classification for federal tax purposes as provided in Treas. Regs §
											301.7701-3. An eligible entity
					 with at least two members can elect to be classified as either an association
					 (and thus a corporation under Reg. §
											23038(b) -
					 2(b)(2)) or a
					 partnership, and an eligible entity with a single owner can elect to be
					 classified as an association or to be disregarded as an entity separate from
					 its owner. Paragraph (b) of Treas. Regs. §
											301.7701-3 provides a default
					 classification for an eligible entity that does not make an election. Thus,
					 federal elections are necessary only when an eligible entity chooses to be
					 classified initially as other than the default classification or when an
					 eligible entity chooses to change its classification. An entity whose
					 classification is determined under the default classification retains that
					 classification (regardless of any changes in the members' liability that occurs
					 at any time during the time that the entity's classification is relevant as
					 defined in subsection (d) of this regulation) until the entity makes an
					 election to change that classification under paragraph (c)(1) of Treas. Regs.
					 §
											301.7701-3. Paragraph (c) of
					 Treas. Regs. §
											301.7701-3 provides rules for
					 making express elections. Subsection (c) of this regulation provides that for
					 purposes of the taxes imposed by Part 11 of the Revenue and Taxation Code
					 (Corporation Tax Law, commencing with Revenue and Taxation Code section
					 23001),
					 the classification of an eligible business entity shall be the same as the
					 classification of the entity for federal purposes and that if the separate
					 existence of a business entity is disregarded for federal tax purposes, the
					 separate existence of that business entity shall be disregarded. No separate
					 election is allowed. Subsection (d) of this regulation provides special rules
					 for foreign eligible entities. Subsection (e) of this regulation provides
					 special rules for classifying entities resulting from partnership terminations
					 and divisions under Section
					 708(b) of the
					 Internal Revenue Code. Subsection (h) of this regulation sets forth the
					 effective date of this regulation and a special rule relating to prior
					 periods.
(b) Classification of
					 eligible entities that do not file an election --
(1) Domestic eligible entities. Except as
					 provided in subsection (b)(3) of this regulation, unless the entity elects
					 otherwise, a domestic eligible entity is--
(A) A partnership if it has two or more
					 members; or
(B) Disregarded as an
					 entity separate from its owner if it has a single owner.