A Story About The Most Recent State Business Taxes
California small business owners need to understand the state business taxes because unfortunately, the state levies higher-than-average taxes on business and personal income. Plus, California is one of the few states that imposes both taxes—business and personal—on small business owners who set up their businesses as pass-through entities like S corps or limited liability companies (LLCs).
Businesses formed using one of these designations will avoid federal income tax, as the income they earn passes through to the business owners. The IRS sees it as double taxation to tax both the business owners on the pass-through income and the business itself…as a result, the federal government taxes only the business owners at their personal income tax rates. Most states adhere to this same rationale, but California is one of a handful of states that gets these business owners from both sides.
Based on several factors, such as the net income of a pass-through entity and the amount of personal income derived from the business by its owners, California’s double taxation can be as much as twice a small business owner’s tax burden. Given the state’s very high cost of living, the tax treatment of small businesses in California create unique challenges for entrepreneurs and small business startups.
Here’s an overview of the types of state business taxes that are imposed upon business owners. Remember that in addition to California’s state tax scheme, if your company also does business in say, Nevada or Arizona, those states will have different taxes and different methods of calculating each tax that you’ll need to consider.
State Income Taxes.
There are 44 states that impose a corporate income tax, including California. Traditional corporations and LLCs electing to be treated as corporations are subject to a California income tax of 8.84% of net income derived from business transacted in the state. Businesses that are structured as C corporations will file a tax return from the company itself, which must pay for taxes on its profits. Otherwise, as mentioned above, owners of businesses created as LLCs and S corporations, along with general partnerships and sole proprietorships will pay taxes on the individual level, with the company profits passing through to the owner’s individual taxes.
Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming are the six states with no corporate income taxes. If you have a branch of your company in these states, no corporate tax filing is necessary; however, some of these states (Nevada, Ohio, Texas, and Washington) impose a tax on gross receipts. There’s really no such thing as incorporating your business in a “tax-free” state to avoid all state taxes. While you’re required to comply with the state tax law in whatever state(s) you’re doing business, your California-based business with a subsidiary incorporated in Nevada is still required to pay California state taxes on your income earned in the state.
While this state tax sounds like it would pertain specifically to franchise businesses, it’s merely a tax charged by some states for the privilege of doing business there. In California, there’s an annual $800 franchise tax that applies to almost every LLC registered to do business in the state…and it even applies if your company operates at a loss for the year.
If your business sells taxable goods or services, you must collect sales tax from customers, and you’re responsible for paying the tax to the state of California. The state business taxes owed are calculated by applying the state’s applicable tax rate to the total sales price of the goods or services. California has a statewide sales tax of 7.5%.
If you’re selling goods or services to customers in multiple states, you’ll need to determine which sales are subject to state sales tax. Generally, you aren’t required to collect sales tax unless you have a physical presence in that state. This could be an office or a store in the state, taking orders or performing services in the state, or you own or lease property in the state.
Typically, this tax is levied by the municipality or county assessor. Each county in California collects a general property tax equal to 1% of assessed value. This general tax is the single largest tax, but there are other smaller taxes that vary by city and district. For example, in Sacramento County, the average overall tax rate including bond debt averages around 1.1%.
Any business in California that owns personal property and/or fixtures with a total combined cost of $100,000 or more is required to file a BPS, even if the County Assessor doesn’t request that you file one.
Some forms of personal property are exempt from taxation, such as household furnishings, personal effects, and business inventory. However, business personal property, privately or business-owned boats, and aircraft aren’t exempt under the law.
Make certain that you have a solid tax understanding and strategy for your business.
Contact a Business Expert
Andrew Rogerson serves clients who are business owners and prospective business owners throughout California. If you have questions about business taxes and business opportunities in the state, Andrew can help answer your questions. Take some time to speak with Andrew about business or visit our website. Contact Andrew via email or call him at (916) 570-2674.