Complete Guide for Small Business Taxes in California
Even if completing the federal tax return for your business or yourself can be challenging, you still need to take care of the taxes as well. The tax laws that apply to small businesses vary from state to state. California is not one of the states that don’t have a corporate income tax for you to worry about. You must be knowledgeable about and equipped to meet taxes in California regulations if you’re launching a small business there.
The principles you’ll need to prepare and file a small business tax return in California are outlined in the following guidance.
What Californians Should Know About Small Business Taxes
Despite being a beautiful state to live in and a popular location for enterprises, California doesn’t necessarily make it simple for new small businesses to get started. There are many income tax rates in the state. And there are stringent guidelines for how they apply to personal and commercial revenue.
Your specific business entity will determine how these rates affect you.
Taxes on Corporations in California
California levies three different types of taxes on businesses that are based there. These are the franchise tax, corporate tax, and alternative minimum tax.
The profits of corporations and any LLC that elects to be classified as a corporation are subject to corporate taxes.
Businesses that want to conduct business in another state must pay a fee known as a franchise tax or privilege tax.
The alternative minimum tax is a portion of the municipal taxes that a business must pay, whether or not deductions are allowed.
Taxes on C-Corps in California
You must understand how these relate to you if you decide to create a C-Corp in the state.
Franchise taxes may not be required of C-Corporations in California, but they are nevertheless liable to a corporation tax rate of 8.84% of net taxable income. For tax purposes, this flat rate applies to all companies that the state recognizes as corporations.
Under that rate, businesses may deduct certain expenses from their net taxable income, but there is a catch. California imposes an alternative minimum tax of 6.65%, which restricts the deductions that firms may claim.
Taxes on S-Corps in California
A company with a unique tax status that has been authorized by the Internal Revenue Service is known as an S-Corporation. Smaller corporations may request to be treated at the federal level as pass-through organizations. This means that instead of the S-Corporation as an entity paying taxes on business income, the shareholders will do so on their tax returns.
However, how different states handle S-Corporations varies. S-Corporations are exempt from California’s corporate tax rate. But they are still required to pay the state’s franchise tax to conduct business there.
Taxes on LLCs in California
The majority of limited liability businesses in California, although not all, will have tax circumstances akin to S-Corporations.
You have some discretion over how the state recognizes your company. Especially if your business entity is an LLC. You will pay the corporate tax rate or alternative minimum tax that C-Corps pay. Especially if your LLC chooses to be classified as a corporation.
The state franchise tax will be paid by other LLCs, after which the business income will pass through and be taxed at the same rates as personal income.
Although there is an $800 minimum charge for LLCs, the franchise tax is determined differently for LLCs than it is for S-Corps. LLCs pay a specific and pre-set franchise tax amount. This is based on their gross income level rather than a flat percentage of net income.
Taxes on Partnerships in California
Businesses in California that choose a partnership as their legal form of organization may not be subject to the state’s yearly small company tax. The kind of collaboration in question will determine this. All partnerships continue to be pass-through organizations since their owners must file tax returns and pay taxes on company revenue.
Any limited liability partnerships that are registered with the state are required to pay the $800 franchise tax minimum. Exemptions apply to general partnerships without limited partners.
In a general partnership, profits are instantly and equally shared by the participants in the company. These partnerships are considered sole proprietorships and are exempt from the franchise tax.
Contact Your Part Time Accountant for any additional questions.