California Dissolution Rules and the $800 Franchise Tax — concise, accurate, and ready for client-facing use.

A business no longer needs to be dissolved before year-end to stop the next year’s $800 tax from accruing.

California’s rules for ending the $800 annual franchise tax have changed, and dissolving entities can now avoid unnecessary payments if the correct steps are followed. A business no longer needs to be dissolved before year-end to stop the next year’s $800 tax from accruing; however, tax planning during dissolution is still essential.

Avoiding the $800 Tax After the Final Year

California will not assess the $800 minimum franchise tax or the $800 annual LLC tax for the year following dissolution if all of the following conditions are met:

1. The entity files a final tax return on or before the extended due date for the preceding taxable year.

2. Business activity in California completely ceases after the final taxable year.

3. A Certificate of Dissolution, Surrender, or Cancellation is filed with the Secretary of State within 12 months of filing the final return.

The final return must have the “Final” box checked and be clearly marked “Final” at the top of page one. Once the business ceases operations, no additional franchise tax will accrue—even if the Secretary of State paperwork is filed much later—so long as it’s completed within the 12-month window.

Example

XYZ Corporation closes in November 2025 and files its final 2025 return on March 16, 2026, paying the $800 for 2025. Because the company has no activity after November 2025, it does not owe the 2026 $800 tax, even if it waits until November 2026 to file dissolution documents.

Year of Dissolution: Timing Your Deductions

Dissolving entities should pay their tax preparation fees and any remaining business expenses during the year of dissolution. If paid the following year, these amounts may become nondeductible miscellaneous itemized deductions when paid by shareholders, partners, or beneficiaries—providing no tax benefit. Paying early ensures the deduction is captured while the entity still exists.

The same rule applies to legal fees, cleanup costs, and any final winding-down expenses. California does not allow cash-basis taxpayers to accrue unpaid expenses into the final year.

Short-Year Rules

If an entity dissolves before filing its final return, its taxable year ends in the month of dissolution. This affects the filing deadline.

Example: A calendar-year S corporation that dissolves in October has an extended deadline of July 15, not September 15. Dissolution during December does not create a short year.

Staying Compliant and Avoiding Surprises

California frequently updates its guidance. Businesses should monitor Franchise Tax Board and Secretary of State updates related to:

• Final-year returns

• Short-year deadlines

• “Doing business” standards

• Dissolution and cancellation procedures

Following all steps correctly prevents unnecessary $800 assessments and ensures the entity is properly closed both legally and for tax purposes.

California Dissolution Rules and the $800 Franchise Tax — concise, accurate, and ready for client-facing use.

https://www.sandiegotaxhelp.com/contact

To listen to this podcast, go to: https://traffic.libsyn.com/secure/spidellpublishing/SCM_11-30-25.mp3