California is one of the most popular states in the USA where many big corporations thrive. Companies including Apple Inc, Alphabet Inc. (Google), Intel Corporation etc are few names in the list. Silicon Valley – the startup hub and the Hollywood – the home of US film industry are located in California. So, what about business taxation in California? Let’s check!
California has a Franchise Tax, Corporate income tax, and an alternative minimum tax. This is based on your business legal structure and amount of taxable income your business may be eligible for. It could be one or more of these taxes. Also, if your income from the business is passed through to you personally then that income will be subject to your personal state income tax.
Corporate tax is applicable to Corporations and LLCs that elect to be treated as Corporations. The corporate tax rate is 8.84% and this is subject to the AMT or Alternative Minimum Tax of 6.65% which is a tax that limits the activity of writing down income tax to minimize corporate tax.
A franchise tax is applicable to S Corporation, LLC, Limited Partnership, Limited Liability Partnerships. If C Corporation has non-taxable income then they are not applicable to Corporate tax. Instead of Corporate tax, Corporations must pay Franchise tax.
A traditional corporation or C Corporation with taxable income pays the corporate tax of 8.84%, or potentially the AMT (Alternative Minimum Tax) of 6.65% which is based on Federal AMT Rules.
If your corporation has a net taxable income of $150,000 you will owe a corporate income tax of $13260 (8.84% of 150,000).
S Corporation is pass-through entities and pay a 1.5% Franchise tax of net income with a minimum tax of $800.
If your S Corporation has a net income of $150,000 you will owe a Franchise tax of $2250 (1.5% of 150,000). Additionally, if the business income passes through business owners they must pay personal income tax on it.
Limited Liability Company or LLC
Based on the gross income the LLC’s must pay a franchise or a gross receipt tax. The flat rate depends on the gross income of LLC as follows:
- income from $250,000 to $499,999 = $900 tax
- income from $500,000 to $999,999 = $2,500 tax
- income from $1,000,000 to $4,999,999 = $6,000 tax; and
- income of $5,000,000 or more = $11,790 tax
Additionally, every LLC in California has to pay a minimum annual franchise tax of $800.
Since LLC’s are pass-through entities they are not required to pay federal income tax. Instead of that, the net income from an LLC will be divided among you and other LLC members and you will each pay the respective state personal tax returns. This will be based on your overall income for the year.
If your LLC has a gross income of $150,000 and net income of $80,000 the LLC will owe a minimum franchise tax of $800. In addition, the net income will be divided among you and other LLC members and you will each pay your individual state tax returns.
Limited Partnership and Limited Liability Partnerships must pay a minimum franchise tax of $800. And, the net income from your partnership is divided with your individual partners and they will each pay their personal income tax return on their total income.
Similar to Partnerships, the income from the business is given to you as a Sole Proprietor and you will pay the personal income tax to the state.
Please note that we are not legal or tax experts, this California business tax guide is prepared as a general information only and should not be considered as legal or replace any other tax or professional advice. We strongly advise you to consult a tax or legal expert for your California business tax preparation. For further guidance, you can also check the California Franchise Tax Board.