Running a business in California can be very exciting, especially in the beautiful major cities of San Francisco and Los Angeles. Who wouldn’t want to own a business there? Of course, before you start your own business, there are a few tax rates that you should be aware of, especially the corporate tax rate in California.
Regardless of whether you are a new business or an already established business in California, there are some corporate tax rate basics you will want to know. This brief article will cover all you need to know about this tax rate and who you can reach out to for additional questions.
The Corporate Tax Rate in California
The corporate tax rate in California for income taxes on personal income and business income is higher than average than other states. In addition, California is one of the few states that impose personal and business taxes for small business owners with LLCs and S corporations.
Double Taxation in California
In general, businesses with S corporation or LLC designations typically avoid federal income tax because they can pass it through to their business owners. The government considers this as double taxation to tax both the business owners on the business itself in addition to the pass-through income. California is one of the major states that hit business owners on both sides.
Depending on several different factors, including the amount of personal income and the net income of the pass-through entity, this double taxation can be as much as double a small business’ original tax burden. When you consider the high cost of living in California, the tax treatment of small businesses in California can make it hard for entrepreneurs to get their businesses up and running.
Different Types of California Business Taxes
In California, they impose three different types of income taxes on businesses. Those three taxes are franchise tax, corporate tax, and alternative minimum tax. Almost all of the companies in California are subject to at least one of those taxes, and sometimes they are subject to more than one.
The corporate tax applies to all LLCs and corporations that elect to be treated as corporations. The corporate tax rate is 8.84%, which is higher than average and applies to net taxable income from any business activity in California.
Corporations are not subject to the franchise tax, but they are subject to the alternative minimum tax of 6.65%. The franchise tax makes it almost ineffective for any business to try to write off any expenses to help lower their corporate tax rate.
The franchise tax applies to any LLCs, limited liability partnerships, limited partnerships, and S corporations. Traditional corporations or C corporations are not subject to the corporate tax if they don’t have positive net incomes. Instead, they must pay the franchise tax.
Alternative Minimum Tax
The alternative minimum tax of 6.65% is based on federal alternative minimum tax rules, and it applies to LLCs and C corporations that choose to be treated as corporations. This tax prevents corporations from writing down income to minimize their corporate tax.
How Are C Corporations Taxed?
C Corporations, also known as traditional corporations, pay the alternative minimum tax of 6.65% or the corporate tax of 8.84%. The one which the company must pay depends on if they claim net taxable income.
For example, a C corp with a net taxable income of $1 million would owe 8.84% of that income. That would equate to about $88,400.
In addition to paying taxes on their business net taxable income, the state taxes shareholders on any personal income derived from the business. If that money paid is in the form of dividends, California taxes the dividends at 13.3%. That tax rate is one of the highest in the United States.
How Are S Corporations Taxed?
S corporations that provide similar financial and legal protections as C corporations pay a franchise tax of 1.5% of net income. The minimum franchise tax in California is $800, even if the S corporation claims zero or negative net income.
For example, an S corporation with a net income of $1 million owes 1.5% of its net income. This would equate to about $15,000 that the company would need to pay based on California’s state income tax rates.
The business owners will also need to pay a personal state income tax on the business income that passed through to them. California has nine different brackets for personal income tax, with marginal rates from about 1% up to 12.3%.
Tax Rate for LLC California
Limited liability companies, also known as LLCs, pay the franchise tax, but they are calculated much differently than S corporations. Instead of paying a percentage rate based on the company’s net income, LLCs are taxed at a flat dollar amount rate based on which gross income tier they fall into. For example, LLCs with gross revenues of about $250,000 and $499,999 pay $900 in taxes.
Other gross incomes and their taxes:
- $500,000 up to $999,999 pay $2,500 in taxes
- $1,000,000 up to $4,999,999 pay $6,000 in taxes
- Greater than $5,000,000 pay $11,790 in taxes
Any businesses that only bring in less than $250,000 in gross income will only need to pay up to $800 for their franchise tax. Net income that passes through the LLC to the business owners will also face taxation at the personal level depending on the business owner’s personal income tax bracket.
Partnerships and Sole Proprietorships Taxation
The type of tax treatment that a partnership receives depends on the kind of partnership. For example, limited liability partnerships must pay the $800 minimum franchise tax.
They could pay more, depending on their gross income. In addition to that tax, the business owners must pay their personal tax on any income received through the partnership.
Sole proprietors only pay taxes on their personal income taxes since their income goes directly to the business owners. This also applies to general partnerships.
Federal Corporate Income Tax
The federal corporate income tax rate is bracketed according to the income level. There are eight different federal corporate tax brackets.
Different federal corporate tax brackets and their tax rates:
- 15% for income ranging between $0 up to $50,000
- $7,500 in addition to 25% of any income over $50,000 up to $75,000
- $12,750 in addition to 34% of any income over $75,000 up to $100,000
- $22,250 in addition to 39% of income over $100,000 up to $335,000
- $113,900 in addition to 34% of income over $335,000 to $10 million
- $3,400,000 in addition to 35% of income over $10 million to $15 million
- $5,150,000 in addition to 38% of income over $15 million to $18.3 million
- $6,416,667 in addition to 35% of income over $18.3 million
If you are unsure of which bracket you fall into or what taxes you must pay for your business, it would be best to reach out to a reputable tax advisor. They will help you sort through which taxes you owe federally.
Other Significant Taxes in California
In addition to the federal and state tax in California, there are other taxes that you should also be aware of. For example, you must also pay sales and use tax of about 7.25%.
This sales tax applies to any retailers’ receipts from their sales of any tangible property and is imposed directly when a client purchases that item. A use tax applies to any items purchased with the purpose of using them in the state of California. These taxes are self-reported and are paid based on your jurisdiction’s elected rate.
Each county government in California has the opportunity to administer the state’s property tax. In this state, tax is based on 100% of the property’s value, and the State Board of Equalization oversees the valuation done by the county’s assessor. Although the property tax rate in California is about 1.1%, the tax rate will vary based on the value of the property in question.
When land or real property, such as a building or a home, goes through a change of ownership or there is new construction installed, the land or property must go through an appraisal. The property is then adjusted every year at the current inflation rate, which the Consumer Price Index sets out.
Personal Property Taxes
Personal business property is taxed at the same rate as real property, and the business owner must reappraise it each year. If the value of the business’s real property is higher than the market value, the property can be reduced.
All business owners must file a property statement that states the property’s value. Business owners must file that document each year with their county assessor to ensure that their records are up to date.
Every business owner with employees must pay a certain amount of money to the Unemployment Insurance Fund. This fund helps to pay for unemployment benefits. All business owners are typically required to pay approximately 3.4% on the first $7,000 on their employee wages.
In California, disability insurance is a form of tax that employees pay, and the California Employment Development Department regulates it. The maximum amount of disability insurance is about $434 per employee. The limit for taxable wages for each employee each year is $93,300.
California Nonprofit Tax Exemptions
Nonprofit organizations in California, such as certified 501(c) nonprofits, may qualify for federal and state corporate tax exemptions on their income. To qualify as a 501(c) in California, a tax-exempt status, a business must receive a nonprofit Tax-Exempt ID from the Internal Revenue Service.
Standard nonprofit organizations exempt from corporate income tax:
- Churches, mosques, synagogues, and other religious institutions
- Labor unions
- Nonprofit schools and colleges
- Some research institutions
Some social clubs and recreational groups can also possibly receive exception status. It is important to note that the state may require your nonprofit to file additional paperwork in order to receive exemption status approval.
If your business operates in more than one state than just California, it is crucial to be aware that your business may have a “nexus.” This means that you may also need to pay taxes in those states.
It also works the other way. If you incorporate in Texas and decide to do business in California, you will need to pay taxes in California. If you need help defining what a “nexus” is, you may need to reach out to a tax professional for more information.
Benefits of a Tax Professional
Regardless of the type of business entity you own, it is best always to have a tax consultant on your side. If you don’t already have a tax professional, you may want to reach out to one as soon as you can so that you don’t miss any tax deadlines. The taxing rules in California can quickly become overwhelming and confusing.
More Time for Business Strategies
Your primary focus as a business owner is maximizing profits, exploiting opportunities, and expanding your business. Of course, being a business owner comes the responsibility of handling your taxes which you may not have enough time to deal with.
When you work with a reputable tax professional, they can take that task off your hands. All they will need from you is access to your financial records to ensure that they take care of all the possible taxes you need to pay throughout the year.
There are numerous accounts, statements, and transactions that deal with various income and expenses that you must tend to while dealing with any payable tax liabilities. In the state of California, you must deal with the corporate tax rate in addition to other federal taxes, which can quickly become very overwhelming.
Keeping track of all these fees and taxes is challenging, especially when you have other things to tend to. A reputable tax professional will ensure that your tax returns are as accurate as possible. They will also be able to find you any potential deductions.
The last thing you want is for your business to receive a notification of an audit from the IRS. You can reach out to a tax advisor to handle your tax paperwork to prevent this.
These professionals have the proper training to prepare and inspect your tax forms to avoid your business from an audit. Even if your company does get audited, you can count on your tax professional to take care of that for you.
Contact a California Tax Professional
The corporate tax rate in California can be a difficult concept to apply to your business, especially if you are new to running a business in California. Even if you already have a business in this beautiful state, you may still struggle with keeping up with all the different taxes and requirements.
Continue reading our blog and learn more about Federal and State Taxes.