Registering a Business in California
Most businesses that conduct business in California are required to register with the California Secretary of State. All businesses are also required to file state income tax returns with the California Franchise Tax Board. Check with the California Business Portal for additional registration requirements.
S-Corporation Income Tax
California is unusual among the states in that, while it does recognize the federal S election, it does not treat S corporations as pass-through entities for state tax purposes. Instead, California requires S corporations to pay a 1.5% franchise tax on income, with a minimum tax of $800. In addition, an individual S corporation shareholder will owe tax to the state on his or her share of the company’s income. S corporations are required to file Form 100S.
LLC/Partnership Income Tax
California LLCs and partnerships are required to pay the minimum franchise tax of $800. Partnerships are required to file Form 565. LLC’s are required to file Form 568.
Corporate Franchise/Privilege Tax
California’s franchise tax applies to S corporations, LLCs, and partnerships.
For S-corporations, California franchise tax is 1.5% of the corporation’s net income, with a minimum tax of $800.
For LLCs and partnerships, the franchise tax is a flat fee rather than a percentage of income, and varies based on net income from California:
Individual Income Tax
Shareholders and partners with gross income assignable to California may need to file an individual income tax return that reflects their portion of California income. Individual income tax is filed on Form 540.
Individual income tax rates are as follows.
CA Personal Income Tax Calculation
There are several ways California's income tax system differs from the federal tax system. Here is the breakdown of how personal income taxes are calculated in CA:
California uses a fixed conformity to the federal tax code as it existed in 2015.
The starting point for computing California's personal income tax liability is the federal adjusted gross income.
California has a state defined standard and itemized deduction. The standard deduction for 2020 is:
• $4,537 if filing as single or married filing separately
• $9,074 if married filing joint, head of household or qualifying widow(er).
They set their own values for the personal exemption but use federal definitions for eligibility. The 2020 personal exemption amount is $134.20 for each filer and qualifying dependents.
California does not conform to the Internal Revenue Code (IRC) Section 199A, also known as the QBI deduction.
CARES Act Guidance
California does not conform to the IRC Section 172 of the CARES Act regarding business net operating loss (NOL) provisions. Instead, California will retain its treatment of business NOLs, not allowing any carryback and allowing only a 20-year carryforward. It also does not conform to the loan forgiveness related to the Paycheck Protection program.
S corporation, partnership, and general LLC returns are due on the 15th day of the third month following the close of the tax season. For most filers, this will be March 15th.
Single member LLC and individual income tax returns are due on the 15th day of the fourth month following the close of the tax season. For most filers, this will be April 15th.
S corporations that are required to make estimated payments use Form 100-ES.
Individual taxpayers who can expect to owe more than $500 in tax are required to make estimated tax payments. Individuals can use Form 540-ES found in the income tax booklet above.
Filing an Extension
If an S corporation cannot file its California tax return by the due date, it may file on or before the 15th day of the 9th month after the close of the tax year without filing a written request for an extension. Partnerships and LLC’s are automatically granted a seven month extension.
Individual income tax returns will be automatically be given an additional six month extension to file without a late fee being imposed.
An extension to file does not extend the payment due date. In any case, any tax due must be paid by the original due date.
The late filing penalty is 5% of the tax due, after allowing for timely payments, for every month that the return is late, up to a maximum of 25%.
If your business was formed or is located in another state, but generates income in California, it may be subject to California taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.
California Secretary of State:
California Franchise Tax Board: