Tax season is still a few months away, but it is not too early to start thinking about getting organized to file your taxes, especially if this is your first time filing taxes as a business. California has some pretty strict rules about small business taxes that are different from federal tax laws, so it is important to familiarize yourself with state tax laws so you know exactly what you are getting yourself into come tax season. The following guidelines are general rules you should know, but we recommend contacting an experienced Santa Monica or Los Angeles business law attorney to gain a better understanding of these laws and how they apply to your business.
Three Types of Taxes
Your California business is subject to three types of taxes:
Franchise tax: Applies to S corporations, limited liability companies (LLCs), limited liability partnerships (LLPs), and limited partnerships (LPs). C corporations (traditional corporations) that do not have any net taxable income are subject to the franchise tax as well. The current franchise tax in California is 1.5%, and the minimum franchise tax is $800, even on businesses that are not making any profit.
Corporate tax: Applies to all business entities not subject to the franchise tax. Namely, C corporations and LLCs that elect to be treated as corporations are subject to the corporate tax. The current corporate tax rate in California is 8.84%.
Alternative minimum tax (AMT): Applies to the same entities that are subject to the corporate tax. The AMT rate is based on the federal rate and serves to prevent corporations from writing down their income to avoid being subject to the corporate tax. The current AMT rate is 6.65%.
At the federal level (and in most states), pass-through entities such as S corporations and LLCs are only taxed once - the business owner is taxed at the personal income tax rate. In California, however, even pass-through entities like S corporations and LLCs are taxed at both the business level and the personal level. Many factors play into how much overall tax a small business will receive, but this amount can be as high as double the tax rate that the business would have without double taxation.
For example, an S corp that makes $100,000 will be taxed at the 1.5% franchise tax rate, or $1,500. The business income will then pass through the business and to the business owners, who must then pay personal income tax on that income. In California, personal income tax ranges from 1% to 12.3%, with nine income brackets in between.
Contact a Santa Monica or Los Angeles Business Law Attorney
As you can see, California has pretty stringent laws on business taxes, and the rules can be hard to follow as they differ quite a bit from federal tax laws. Get a head start into tax season and start working with one of the business law attorneys at Verhagen Bennett today to get a comprehensive business review. Contact us at 310-917-1064 or visit our website to find out how we can help you.
(image courtesy of sharon-mccutcheon)
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© 2018 Verhagen Bennett LLP — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.