702-871-8678
California Business Tax – Complete Guide
A business owner in California or any other state in the USA has to understand and comply with their federal, state, and local tax requirements. The type of tax levied and the rate vary from one state to another. For example, the rate of California business tax for corporations is lower than other states like Iowa, which has the highest corporate tax rate. Corporate tax is not the only tax that a business may be required to file as the type of business taxes will also vary from one state to another. However, most states will tax some form of business income derived from the state of formation by the said business. Taxes are as integral to businesses as is earning revenue and it is hence beneficial to understand beforehand how your business may be taxed.
California Business Tax
This guide provides you with information pertaining to different types of taxes in California, how different forms of businesses are taxed and California business tax rate for specific business entities or tax categories.
There are several advantages of starting a business in California including strong infrastructure and a robust economy. The state has dynamic metropolitan areas like San Francisco, Los Angeles, and San Diego while cities like Palo Alto, Yorba Linda in Orange County, San Francisco, Santa Monica, and Los Angeles provide the perfect business environment for startups and entrepreneurs.
If you start a new business in the “Golden State” then depending on the type of business, you will be required to file California business tax returns. It is important to understand the fact that every business or business owner in the US will have some form of federal, state, and local tax requirements and this is irrespective of the state of formation.
What taxes do businesses pay in California?
Business taxes vary from one state to another and California business tax comprises three types of taxes, which are corporate tax, franchise tax, and alternative minimum tax. If you form a new business in California then all or one of these taxes will be applicable for your business. Let’s try and understand what these taxes imply and what the California tax rate is for each of these taxes.
Corporate tax
A California corporate tax is a type of direct tax that is also known as company tax or corporation tax. This type of tax is imposed on the profits earned by a corporation. If you form a corporation in California then the corporate tax would be payable on the taxable income of your company. The taxable income includes revenue earned minus the cost of goods sold (COGS), research and development, depreciation, selling and marketing, general and administrative (G&A) expenses, and any other operational cost. Apart from corporations, this tax is also applicable to limited liability companies that have elected to be treated as corporations. The Corporate tax rates vary from one state to another and are levied in 44 states including California. The California corporation tax rate is 8.84%, which is higher than the US average. The rate of 8.84% is for corporations other than banks and financials and the rate is 10.84% for banks and financials. The due date for filing of the California corporate tax return is on the 15th day of the 4th month after your fiscal year ends but if you are not following a fiscal year then the due date will be March 15th each year.
It is important to understand that the California corporate tax is imposed on only those businesses that conduct their business in California and derive their income from within California.
Franchise tax
A franchise tax is a type of California business tax that is paid by certain forms of businesses just to conduct their business in a specific state. Some US States like Kansas and Missouri have eliminated franchise taxes while other states like Alabama and Georgia impose franchise taxes just like California. A franchise tax is also known as a privilege tax as it provides businesses with the right to operate with that state. California franchise taxes are applicable for a variety of business structures including limited liability companies (LLCs), S corporations, limited liability partnerships (LLPs), limited partnerships (LPs), and traditional corporations (C corporations). The California tax rate or franchise tax rate may vary from one form of business structure to another.
The California business tax rate or franchise tax rate is 1.5% of the net income of a corporation with the minimum tax payable being $800. The tax rate for a limited liability company is a flat fee instead of a percentage rate and this fee will be dependent on the total income or gross income earned in California. The breakdown for calculating this type of California business tax is:
- The tax fee on income earned between $250,000 and $499,999 is $900
- The tax fee on income earned between $500,000 to $999,999 is $2,500
- The tax fee on income earned between $1,000,000 to $4,999,999 is $6,000
- The tax fee on income earned on $5,000,000 or more is $11,790
The franchise tax is due on the 15th day of the 4th month from the date you file with the Secretary of State for payment of your first-year annual tax e.g., if you register your LLC with SOS on April 17, 2021 then the annual LLC tax will be due on July 15, 2021.
Alternative Minimum tax
The Alternative Minimum Tax (AMT) is a California income tax imposed by the federal government and is considered as an alternative minimum tax for businesses and individual taxpayers earning above a certain threshold. The AMT does not include any deductions or exemptions and the California business tax rate for AMT depends on where the income falls within the AMT threshold. It is also important to note that it will be mandatory to pay AMT taxes if the adjusted gross income tax is more than the exemption level. The Alternative Minimum Tax provisions have created an entirely parallel system of taxation, which normally targets corporations that show an Alternative Minimum Taxable Income (AMTI) of over $40,000.
How are California Businesses taxed?
If you start a new business in California, one of the primary considerations that you have to make is that of tax status. Different types of entities are taxed differently while some businesses are required to file California income tax as well as business tax. The California tax rate is dependent completely on the type of tax your company is required to file. Let’s look at the different types of entities and their taxations.
Taxes for California LLC
A standard LLC is similar to an S corporation as they are both pass-through entities and this simply means that they are not required to pay any federal income tax. Instead, the income earned from the business will get distributed amongst the members of the limited liability company and then each member would be required to file federal and state taxes based on the amount received from the business. In such a scenario, members would have to file California income tax returns.
Similarly, a standard California limited-liability company is also required to pay California business tax in the form of franchise taxes and it is calculated differently than that of an S corporation. Instead of a flat California tax rate or percentage rate, LLCs are subjected to a flat dollar amount based on their gross income tier like if the gross income of an LLC was between $500,000 and $999,999 then they would be required to pay a tax of $2,500. It is also important to note that a California LLC has to pay a minimum franchise tax of $800.
A limited liability company (LLC) is classified as a partnership for tax purposes or as a disregarded entity if it is a single-member LLC. You will have the option to elect for the tax classification of a corporation for the said LLC. In that case, your LLC would be subjected to California corporate tax and even alternative minimum tax, if necessary.
Taxes for California C Corporations
C corporations are known as traditional corporations and will be subjected to California corporate tax of 8.84% or Alternative Minimum Tax (AMT) of 6.65%. The type of tax it will be subjected to depends on whether the entity claims net taxable income e.g., a business corporation that has a net taxable income of $2 million and it will be subjected to California corporation tax rate of 8.84% of the income, thus the tax to be paid will be $176,800.
Similarly, a California corporation that does not have any taxable income will be subjected to California business tax in the form of franchise tax.
Taxes for California S Corporation
An S corporation can be created only if you have a C or traditional corporation or an LLC. Once you have formed a corporation, you will need to fill and submit IRS form 2553 pursuant to section 1362 of the Internal Revenue Code. If you have an LLC then you will have to elect to be taxed as an S Corporation. S corporations are considered to be pass-through entities and hence it will not be subjected to a separate federal income tax. Instead, any taxable income generated by an S corporation will be passed through to the shareholders of the company and each shareholder will be subjected to federal tax on each shareholder’s share of the income. In California, an S Corporation is not treated as a pass-through entity for California business tax purposes. As a result, a California S corporation will be subjected to franchise tax. The franchise tax or California business tax rate will be 1.5% on income and the minimum tax will be $800. In addition to this, all S corporation shareholders will have to file an income tax on their share of the company’s income.
Taxes for California Sole Proprietorships
If you start a sole proprietorship in California then it will be treated as an individual for California income tax purposes. For Example: if the net income from your sole proprietorship is $100,000 then it will be distributed to you. As a result, you will have to report your business income and expenses on IRS Form 1040 Schedule C and file your estimated tax on the Form 540-ES: Estimated Tax for Individuals. The California tax rate will vary depending on the overall net income you have earned in a given tax year.
Taxes for California Partnerships
The California business tax treatment of a partnership firm will depend on the specific type of partnership. A Limited Liability Partnerships (LLP) and a Limited Partnership (LP) will be required to pay a minimum franchise tax of $800 while the business owners have to file personal income tax on any income that is passed through from the company to them. You will be required to file Partnership Return of Income (Form 565).
Ready to Incorporate your California Company?
Whether you are planning to form a traditional corporation or a limited liability company (LLC) in California, the incorporation or new business formation process can be quite difficult, extensive, and time consuming. You may be required to file multiple documents and provide information pertaining to the business and personal details and ensure everything is as per the requirements of the California Secretary of State. This is where IncParadise has its expertise! We are an expert incorporation service provider in California and can help to register your LLC or corporation in the state. IncParadise also offers Registered Agent Services in the state of California as LLC and corporate law require all types of business entities formed or incorporated in the state to designate and maintain a registered agent in this state. A top California registered agent like IncParadise plays the all important role of maintaining communication with the California Secretary of State (SOS) in matters related to the incorporation or formation of a domestic or foreign business entity.
Once you’ve registered your LLC or corporation you will be required to fulfill several annual requirements like renewing a business license to operate in California and Statement of Information. Keeping in mind the annual maintenance and requirements by the state, IncParadise offers several additional services like helping you obtain a tax ID (EIN) number, S Corporation status election, and California Certificate of Good Standing among others.