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Los Angeles City Business Tax annual filing due February 29
February 2024
In brief
What happened?
The annual Los Angeles City Business Tax (LACBT) is due this year on February 29, 2024, and for some taxpayers conducting business in Los Angeles, such a short deadline may be their first tax filing of the year.
Why is it relevant?
Companies unknowingly may be subject to the LACBT due to broad nexus standards that include regularly soliciting business in Los Angeles. With work-at-home arrangements becoming more mainstream, companies unexpectedly may find themselves triggering a filing obligation or increasing/decreasing their level of business activity in Los Angeles.
Actions to consider
In light of the unique and complex rules relating to the LACBT, businesses should analyze whether a filing obligation exists, what gross receipts may be subject to apportionment, and how such gross receipts should be apportioned to Los Angeles. For companies subject to the tax but not yet registered, a voluntary disclosure program is available.
For a discussion of the San Francisco city taxes Tax, due on February 29, 2024, access PwC’s Insight, available here.
In detail
Los Angeles City Business Tax overview
The LACBT is a business license tax for the privilege of conducting business in the City of Los Angeles (City). The license tax is a gross receipts-based tax levied against taxpayers that are either located within the City or engaged in business in the City.
The threshold to be deemed “engaged in business in the City” can be a lower threshold than traditional income tax nexus. A person is deemed to be engaged in business if they have physical presence or regular solicitation of business in the City, if they perform work or render services for seven or more days in the City, or if they consummate four or more transactions in the City.
Observation: Companies may have employees working remotely within Los Angeles as a result of work-at-home arrangements. If such presence is treated as satisfying the qualifications noted above, a company may be subject to the LACBT.
The LACBT generally is imposed on all gross receipts of a taxpayer earned in the City at a rate between 0.1% to 6.0% based on in-City business activities. The tax rate varies based on a taxpayer’s business tax classification, with many taxpayers falling within the “professions and occupations” category, with a rate of 0.425% for the 2024 filing. The “professions and occupations” category is the catch-all category for taxpayers that do not fall within other specified tax classifications.
Observation: The City taxing jurisdiction is not limited to the incorporated City of Los Angeles; it extends to various cities located within the boundaries of Los Angeles County.
LACBT renewal
Taxpayers must file the annual renewal by February 29, 2024, in order to maintain good standing with the City. The gross receipts measure is based on the apportioned gross receipts of the prior calendar year. The relatively short timeframe between the typical taxpayer’s calendar year-end and the reporting deadline can present compliance challenges for taxpayers.
A 45-day extension may be granted by the Director of Finance upon written request. If an extension request is granted, a minimum of 90% of the tax must be paid by the original due date of February 29 to avoid late filing penalties.
Only those gross receipts deemed attributable to business activities conducted in the City are subject to the LACBT. Depending on the taxpayer’s classification, the methodology used to apportion gross receipts varies. For taxpayers falling within the general “professions and occupations” category, gross receipts are apportioned using a cost-of-performance type methodology, with certain adjustments to the basis of gross receipts depending on the location of certain supporting activities, such as accounting, billing, collection, and administration.
Observation: Taxpayers should consider reviewing their historical methodology for determining their cost of performance and receipts sourced to the City due to the current remote working environment. While certain costs considered in the cost-of-performance analysis, such as rent expense, will not be significantly impacted, costs such as payroll may be significantly affected depending on the location of where services are being performed.
Los Angeles City voluntary disclosure agreement
With the minimal nexus standards, taxpayers may be treated as engaged in business in the City and may be unaware of their LACBT filing obligation. If a taxpayer has not filed an application for a City business tax license and the City has not yet identified the taxpayer, the taxpayer may be eligible to enter into a voluntary disclosure agreement (VDA) with the City. Under a VDA, the City will require a taxpayer to remit taxes and interest for up to six years (depending when business commenced in the City) and will waive any underpayment penalties, which rise to 40% of the unpaid tax liability after four months of delinquency.
Observation: City tax audits can be a challenging process, often spanning numerous years with informational demands that prove to be burdensome for many taxpayers. The City is expected to increase its enforcement efforts with the objective of building reserves of cash against future shortfalls.
The 2024 Business Tax Renewal Form, based on 2023 activity for calendar-year taxpayers, must be filed on or before February 29, 2024.
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