Special CA Tax Considerations for Businesses
Starting a new business in CA is exciting. There’s the initial ideation and snagging your first client. There’s the first deposit that hits your bank account and the first time you realize your income is covering your expenses.
What’s less exciting is dealing with taxes. Unfortunately (or fortunately perhaps) that is something that every business has to deal with, and not understanding the tax environment can cause your business all kinds of problems. So read on to learn everything you need to know about taxes in CA. We promise it won’t hurt too much.
California Minimum Tax
If you are a corporation or an LLC operating in the state of California, you’ll be subject to the annual state minimum tax of $800. Even entities that are registered in a different state but operate within California are also subject to this minimum tax.
For new businesses formed in 2021 and 2022, there is a waiver in place for the minimum tax in effect for the first year the entity is in business. However, if you are a corporation and your actual tax is higher than the minimum tax, you’ll still be required to pay the tax.
California LLC Fee
This California LLC surprises a lot of LLC owners. There’s a fee-based solely on your revenue figure, regardless of your net income. The fees range from $0 – $11,790 based on your annual revenue. This one can be challenging because expanding revenue does not always coincide with expanding profit.
If your business operates on a calendar year, you must prepay your estimated LLC fee each year by June 15th with the remainder due by the following April 15th.
Secretary of State Fee & Statement of Information
It’s worth mentioning that the California Secretary of State requires the regular filing of a Statement of Information with the state. For corporations, the statement is due within 90 days of registering your corporation and then annually for the life of your corporation. For LLCs, the statement is required within 90 days of setting up the business and then every other year thereafter.
The filing can be completed online and usually takes less than 10 minutes to complete, and the fee is under $50 but varies by entity type and year. Though the Secretary of State sends out reminder postcards, if you overlook the filing, you will get a notice 1-2 years later with a penalty of $250 that cannot be waived. Additionally, each entity has its own due date based on when the entity originally registered making it easy to overlook.
Difference Between Federal and California Depreciation
California adheres to many of the federal tax rules, but not all of them. The federal depreciation rules are a notable exception. In recent years, the federal government has allowed taxpayers to claim bonus depreciation of 50-100% depending on the size of the business, type of asset, and year. California has not adopted the bonus depreciation rules which means that you may have significant mismatches between your federal and California deductions.
One of the most notable implications is on new vehicle purchases. For example, in 2021, businesses were allowed to claim up to $18,200 for standard passenger vehicles whereas California limited the first-year deduction to $3,670.
In later years, the depreciation on a vehicle in California may exceed the federal allowed amount, this mismatch can make tax planning more difficult.
Real Estate Withholding Tax
If you’re selling property in California, whether it’s your own home or an investment property, California will want you to withhold state tax from escrow. This often comes as a shock to homeowners and investors. While you can avoid withholding if you do not have any taxable gain, you will have to certify the lack of gain to the state.
Form 593 walks you through the calculation of the gain on sale and requires different withholding depending on the type of entity (or individual) that owns the property.
California doesn’t differentiate between long term and short terms capital gains, and it also doesn’t have different tax rates for qualified dividends. In California, for anything included in your taxable income, then it’s taxed at the same rate. This is true for both individuals and corporations.
For people used to the federal favorable tax treatment of certain types of income, this can come as a shock at tax time.
The Good News About Taxes in CA – Pass Through Entity Tax (PTET)
Though most of the items above are either bad news or pitfalls to watch out for, there is good news for business owners in the golden state. For 2021-2026, the years in which there is a state and local tax (SALT) deduction cap on individual tax returns, the state of California has created a pass-through entity tax (PTET) that allows business owners to pay a business tax and get a dollar-for-dollar credit on their individual tax returns.
Because business taxes are allowed as a deduction under federal law, paying this tax through your business effectively negates the SALT cap on your individual return and makes the tax paid through your entity fully deductible.
It’s not that simple though. There are strict rules on who can participate (sole proprietorships and single-member LLCs are out of luck) and if you elect to participate you must pay 9.3% of your business’s taxable income to the state of California – you don’t get to decide how much of your profit is paid in for taxes. However, each owner of the business has the option to opt-in independently.
With all of These CA Taxes, Is It Still Worth Doing Business Here?
Of course! While California has its fair share of regulations and taxes, it also has a thriving business environment that has been creating awesome businesses for years. (It also happens to be a great place to live.) Just remember to be careful about satisfying your business’s regulatory and tax requirements so you don’t end up hurting yourself in the long run.
If you want to dive even deeper and learn everything you could ever want to know about starting a business in CA, check out this great article on the subject. Or, if you want to go direct to the source, familiarize yourself with the CA Secretary of State website, there is all kinds of important info there.
Need some help with anything that has to do with taxes in CA? Reach out to My OC Bookkeeper. We are California’s premier bookkeeping, accounting, outsourced CFO, and business advisory firm and help businesses all over California.
Want to learn everything you need to know about starting a business in CA? Check out the great video below.