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.
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.
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.