Does a federally disregarded limited partnership owe California's $800 annual tax?
Edvin Givargis Published 5 minute read
The short answer
No. Since Legal Ruling 2019-02, the Franchise Tax Board's position is that a limited partnership whose separate existence is disregarded for federal income tax purposes is likewise disregarded for California purposes, which means it does not file a California partnership return and does not owe the $800 annual limited partnership tax (Rev. and Tax. Code sections 17935, 18633; section 23038). The ruling reversed years of contrary administrative practice under which these entities, common in real estate and fund structures, filed blank returns and paid $800 a year for an entity the tax law treats as not existing. The answer comes with three follow-on points that do the real work in practice. Entities that paid the tax can pursue refunds, but only for years still open under the statute of limitations, so the claims are perishable. The rule is specific to limited partnerships: a single member LLC that is federally disregarded still owes California's $800 annual LLC tax and still files, because the LLC statutes reach disregarded entities by their own terms. And disregarding the partnership does not disregard its business: the entity's California activities, property, payroll, and sales become the owner's, which can hand the owner a California filing obligation it did not think it had.
How a limited partnership becomes disregarded, and why the answer changed
The fact pattern is stock. A limited partnership has a 99 percent limited partner and a 1 percent general partner, and the general partner is a single member LLC wholly owned by that same limited partner. Federally, the SMLLC is disregarded into its owner, which collapses the partnership to a single owner; an entity with one owner cannot be a partnership, so the LP itself is disregarded, and everything it does is reported directly by the ultimate owner. Structures like this exist for liability and financing reasons, not tax ones, and they are everywhere in real estate.
California's old administrative practice taxed the wrapper anyway: a blank Form 565 and an $800 check every year, by analogy to the treatment of SMLLCs. Legal Ruling 2019-02 conceded the analogy was backwards. California's entity classification statute conforms to the federal check-the-box regime, and where an eligible entity's separate existence is disregarded federally, section 23038 disregards it for California income and franchise tax purposes as well. The annual limited partnership tax attaches to limited partnerships doing business in California, and an entity the law refuses to see cannot be one. The LLC result differs not because the logic differs but because the Legislature wrote it differently: the LLC annual tax and fee statutes apply to disregarded LLCs expressly, so the SMLLC keeps its Form 568 and its $800 regardless of federal classification. That asymmetry, disregarded LP pays nothing, disregarded LLC pays $800, is arbitrary looking but statutory, and it is the current state of the law.
The cleanup: refunds, final returns, and enforcement notices
For structures that spent years paying the tax, the ruling opened a straightforward but time-limited remediation path. Refund claims can be filed for the annual taxes paid in years still open under the limitations period, and the FTB's companion procedures (Notice 2019-06) address the administrative side, including how to respond when the Board's filing enforcement program, noticing that a longtime filer has stopped, generates demands for the missing returns. The response is documentation of the entity's disregarded status, not a return. Practices with a portfolio of these entities should treat the exercise as an inventory problem: identify every limited partnership in the group whose partners collapse to a single federal owner, stop the prospective payments, file the refund claims the statute still allows, and close the filing accounts cleanly so enforcement notices do not arrive every spring for an entity that correctly files nothing. The inventory question is also a diligence question on every acquisition of a real estate structure, because an LP paying $800 it does not owe is a small finding, and an LP that stopped filing without documentation is a future notice stream.
The owner-side consequence nobody prices
Disregarding the entity does not make its business disappear; it moves the business up. Once the LP's separate existence is ignored, its California real estate, its California-source income, and its apportionment factors belong, for filing purposes, to the owner, and the owner may be doing business in California solely by virtue of activities it holds through the disregarded wrapper. An out-of-state owner that never registered in California, on the theory that the LP was the California actor, can find that the ruling that saved it $800 a year also made the owner itself the taxpayer with a Form 565, 568, or 100 obligation, a doing-business analysis under the bright-line thresholds, and its own annual or minimum tax. The same mechanism runs through the related article on nexus from owning a disregarded SMLLC, and it is the reason the ruling should be applied as a structure-level analysis rather than an entity-level deletion. The correct sequence is to redraw the structure chart with every disregarded entity collapsed into its owner, then rerun each surviving taxpayer's California filing analysis on the combined activities. Deleting returns without adding the owner's is how a refund project becomes a nexus exam.
Practice notes
The standing checklist for any partnership group with California footprint has three lines. First, classification: confirm, entity by entity, which partnerships actually have two or more partners for federal purposes, remembering that a GP interest held through an SMLLC owned by the other partner collapses, and that a change in ownership mid-year can flip an entity into or out of disregarded status with return consequences in both directions. Second, money: stop annual taxes that are not owed, claim back the open years before the limitations period trims them, and leave a file memo documenting why the entity ceased filing, since the position rests on an administrative ruling and the documentation is what answers the enforcement notice years later. Third, the owner: rerun the doing-business and filing analysis for whoever absorbs the disregarded entity's activities, including registration with the Secretary of State where the owner is now the one transacting intrastate business. And keep the LP/LLC asymmetry straight in planning conversations, because choice of wrapper now carries a small but permanent annual cost difference, and clients who hear that their disregarded LP owes nothing will reasonably ask why their disregarded LLC still pays.
This article states the law as of September 15, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.