A Lowdown on the California Franchise Tax

California map
The California franchise tax is either the $800 minimum amount or a percentage of the revenue you earn.

 

California map
The California franchise tax is either the $800 minimum amount or a percentage of the net income you earn in your business.

If you’ve ever tried writing down each potential expense involved in running a new business, you probably ran out of ink in your pen and paper to write on. That’s because there are countless expenditures at play when formally pursuing entrepreneurship.

To launch and maintain a business in some U.S. states, you’re even on the hook for an additional franchise tax payment. California is one such state that has a franchise tax on the books.

What Is The California Franchise Tax?

The California Franchise Tax Board is the state tax authority for all residents of California. According to its corporate laws, owners of C corporations, S corporations, and LLCs must pay a franchise tax fee to conduct business within the Golden State. This applies to businesses registered in California as well as businesses registered in other states that do business in California.
For all new businesses, there is a minimum franchise tax fee of $800, and this is an annual fee to be paid each year, as long as the business continues its operations in California. But this tax amount can vary. It is always either $800 or the net income of the corporation multiplied by its applicable corporate tax rate – whichever amount is larger.

Due Date For The California Franchise Tax

Per the California Franchise Tax Board, business owners must pay the minimum franchise tax amount within the first quarter of each and every accounting period on which a firm operates. So, let’s say you open your business on January 1. You’d be required to pay this franchise tax before March 31 each year. Keep in mind that this is a requirement for businesses at all stages – those that are active, those operating at a loss, and those that are not conducting business with any transactions.

The First-Year Franchise Tax Exemption & The 15-Day Exemption

Fortunately, there is some good news in terms of tax savings when considering the California franchise tax. This comes in the form of an exemption on covering this tax for first-year businesses.

Basically, the first-year minimum franchise tax for new corporations can be waived for those that qualify or those that incorporate with the California Secretary of State. However, after this fee is waived, new corporate owners will still be on the hook for paying the applicable franchise tax on any net income they earn during this initial year. In a company’s second year of existence and thereafter, its owner is subject to the annual $800 minimum franchise tax.

It’s important to remember that the first-year exemption only applies to S corporations, C corporations, and LLCs that elect a corporate tax structure. An LLC that is classified as a disregarded entity, such as one taxed as either a sole proprietorship or partnership, is not eligible for the first-year exemption.

In addition to the first-year franchise tax exemption, there is also a 15-day exemption worth noting.

If you start your business at a point at which it would be less than 15 days in length, and you do not conduct any business during this short period, you are exempt from making a franchise tax payment on that brief tax year. But you’d have to pay the franchise tax in subsequent tax years as part of all corporation fees you owe to the state.

Let’s explore a hypothetical example with this. Jackie registers her new S corporation with the state of California on December 18, 2016. She then puts her business aside for the holidays and does not conduct any business until the new year arrives. Her total S corporation fees for tax year 2016 would not include any state franchise tax because of how short her business was in existence during that year.

What Happens If You Change Your Business Structure?

If you change the structure of your business, you generally would owe the franchise tax on both types of business entities you maintain within a given year. For example, let’s say you operate an S corporation from January through March and then convert your business into an LLC in April, you are obligated to pay a franchise tax on both the S corporation you had early in the year and the LLC this company became later in the year.

To ensure you make all required tax payments to the IRS, your state, and to local tax authorities, team up with the experts at 1-800Accountant today. Call 1-800-222-6868, or check out www.1-800Accountant.

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