California business tax basics
More than four million small businesses operate in the state of California and comprise about 99% of all businesses within the state. These businesses employ about seven million people statewide, and, therefore, comprise a crucial part of the state’s economy.
But, owning and operating a small business in California is challenging in many ways. Understanding the tax consequences of operating a small business is, perhaps, the most difficult job for small business owners in California. State and local requests for paperwork are, in general, more frequent, wider-ranging, and more in number than those requested by the federal government. In addition, there are the deadlines for filings as well penalties for missed payments or late filings.
CA taxes for businesses are relatively high, steeper than in the surrounding states. That fact, combined with California’s oppressive business regulations, have led some businesses to move their operations to another state in order to save the money they would otherwise have to spend on taxes.
What you need to know
California can be a costly state in which to own and operate a small business because SMB’s are especially hard hit under the state laws pertaining to CA business taxes. The state has a higher than average state income tax and, unlike the federal government, also engages in “double taxation,” requiring small business owners to pay both business and personal income tax.
California imposes three types of income taxes on businesses depending upon the type of business you own: a corporate tax, franchise tax, and an alternative minimum tax. Almost all businesses in the state are required to pay at least one of these taxes, and some pay more than one.
The corporate tax rate is an 8.84% flat tax and applies to C corporations and LLCs that choose to be treated as corporations, or they pay an AMT of 6.65% depending on whether they claim net taxable income or not.
The franchise tax applies to S corporation, LLCs, limited partnerships (LPs), and limited liability partnerships (LLPs). In addition, traditional or C corporations that don’t earn positive net incomes and, as a result, are not subject to the corporate tax, may then pay the franchise tax.
Calling all Corps
The difference in tax obligations for the small business owner ultimately depends on what type of business entity they decide to form — C corps, S corps, LLCs, LPs, or LLPs. In addition to the type(s) of taxes your business will be required to pay are the multiple deadlines for filing taxes that have to be met and all of the paperwork that comes with filing your business taxes.
If you’re a small business owner in California or if you’re planning on opening your own business, you should consult a CPA with experience in business taxation to determine what type of business entity makes the best “tax” sense for you, what taxes you’ll need to file, and when they’re due.
Making mistakes on your California business taxes can be costly. At GYL CPAs and Advisors, CA business CPA, we provide a full range of accounting, audit, business advisory, and tax services for businesses.