Even if you don’t own a franchise, or a business physically located in California, your business may be required to pay the California Franchise Tax. While the name is a bit confusing, this refers to an annual tax that most businesses in California, as well as some businesses that do business in California, must pay. It starts at $800 and may be higher for some businesses.
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How Much Is The Franchise Tax In California?
The State of California Franchise Tax Board administers the franchise tax, along with other taxes in California. The amount of the franchise tax depends on the type of business entity that is doing business in California.
Keep in mind that your business entity must be the same at the state and federal level. Your business can’t operate and file federal income taxes with the Internal Revenue Service as an LLC or corporation, but then operate and file taxes as a different type of entity to save money on franchise taxes in California, for example.
It’s also important to note that for many types of businesses, income that flows through to the individual’s personal income tax return will be taxed at the California State income tax rate. The same thing applies at the federal level.
In California, the standard deduction for 2023 is $5363 for those who are single or married/Registered Domestic Partner (RDP) filing separately. It is $10,726 for married/RDP filing jointly, head of household, or qualifying widow(er).
You may be required to make quarterly tax payments, just as you make quarterly estimated tax payments to the IRS.
What is the California Franchise Tax for LLCs?
Every Limited Liability Company that is doing business or organized in California must pay an annual tax of $800.
There was a temporary tax break that applies to tax years beginning on or after January 1, 2021, and before January 1, 2024. LLCs that organize, register, or file with the Secretary of State to do business in California during those time frames do not have to pay the annual tax of $800 for their first tax year.
Additionally, If you cancel your LLC within one year of organizing, you can file Short form cancellation (SOS Form LLC-4/8) with the California Secretary of State and your LLC won’t be responsible for the annual $800 tax for its first tax year.
And here are two more exceptions to the first year tax: A single-member LLC or Limited Liability Partnership (LLP), does not have to pay the annual tax and fee if both of the following are true:
- It did not conduct any business in California during the tax year and
- Its tax year was 15 days or fewer
If your LLC will make more than $250,000 you’ll have to pay an LLC fee that operates similar to an LLC tax, and you’ll need to make an estimated fee payment by the 15th day of the 6th month (of the current tax year). The fee ranges from $900 for businesses with total California income of $250,000 – $499,999 to $11,790 for businesses with incomes of $5 million. Learn more here.
An LLC that elects to be taxed as a corporation, it will be taxed at the corporate tax rate (see below).
What is the California Franchise Tax for Corporations?
Every corporation that is incorporated, registered, or doing business in California must pay the $800 minimum franchise tax. There is an exemption that waives the minimum tax on newly formed corporations in the first year of business. In addition, businesses are exempt if they did not conduct any business in California during the tax year and their tax year was 15 days or fewer.
The business tax rate for corporations (other than banks or financials) in California is 8.84% of net income. The Alternative Minimum Tax (AMT) tax rate is 6.65% for corporations that do not show a profit.
For S corps (not banks or financials) the tax rate is 1.5% of net income, with a minimum of $800. (First-year net income is still subject to the 1.5% tax rate.)
Beyond those exemptions, though, corporations in California must generally pay the minimum franchise tax of $800 even if they lost money or the business was inactive.
Read more about corporate tax filing requirements in California here.
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How Do You Calculate California Franchise Tax?
The minimum $800 annual franchise tax is straightforward when it applies. Other taxes such as the S Corporation tax or Corporation tax are more complicated because they are based on net income. Net income refers to income minus tax deductions.
There are a number of California tax deductions that may reduce your taxable income. Most follow federal tax deductions spelled out by the IRS.
It’s a good idea to use accounting software to keep up-to-date information about your business income and expenses. You can then use tax preparation software or work with a tax professional, such as a CPA or Enrolled Agent to make sure you file and pay both federal income tax and California state income tax (plus any other taxes you and your business may owe) on time.
Do I Need To Pay The California Franchise Tax If My Business Is Based Outside Of California?
Perhaps. California considers businesses to be “doing business” if you meet any of the following criteria:
- Are organized or commercially domiciled in California
- Engage in any transaction for the purpose of financial gain within California
- California sales, property or payroll exceed the following amounts. These figures are for 2021:
- CA sales exceed $637,252 or comprise 25% of total sales, or
- CA real and tangible personal property exceed $63,726 (either the threshold amount or 25% of total property) or
- CA payroll compensation exceeds $63,726 (either the threshold amount or 25% of total payroll)
Note that companies located outside of California whose only in-state activity is the solicitation of sale of tangible personal property to California customers may be exempt from state tax under Public Law 86-272.
An example may be a business that uses a website to sell items to California customers, but reviews, processes, and ships orders from outside the state. (On the other hand, use of Internet cookies on California customers’ computers to gather actionable business intelligence that isn’t for the purpose of facilitating that customer’s order could exceed these protections.)
There is a detailed discussion of this topic in FTB Publication 1050. It’s better to be safe than sorry here, so consult your CPA or tax professional to clarify your business obligations.
How to Stay Compliant with the California Franchise Tax
The best way to stay compliant with the California Franchise Tax is to review the tax requirements and due dates at FTB.CA.GOV. The website is easy to navigate overall. Then be sure to set up accounting software and keep your bookkeeping up to date (or hire someone to do it for you), so you can easily access the tax information needed to comply.
Because California business taxes are relatively high and may be more complicated than in other states, you may want to hire a tax professional to help ensure you don’t miss any important tax filing deadlines.
Along those lines, it’s also helpful to use a business bank account for all business income, and a business credit card to pay regular business expenses. Separating your business and personal finances makes it a lot easier to stay compliant during tax season.
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Frequently Asked Questions About the California Franchise Tax
What Happens If I Don’t Pay The California Franchise Tax?
The California Revenue and Tax Code imposes a number of penalties for taxpayers who fail to comply with tax law. See a full list of penalties here.
How to Avoid $800 CA LLC Franchise Tax
The choice of entity affects whether you pay this tax. Sole proprietorships and general partnerships pay no annual franchise tax. You may still have to pay taxes, but business income and expenses simply flow through to the owner or partner’s personal tax returns.
Don’t base your choice of business entity solely on this fee. Forming a California LLC or corporation can provide liability protection, help you save money on federal taxes, and may make it easier for your business to establish business credit and access a wider variety of small business loans.
In other words, you may save some money by operating as a sole proprietor, but you could pay for it in other ways. Consult with an attorney and/or tax advisor to decide the best business structure for your business.
How Do I Pay the Franchise Tax?
You can make California franchise tax board payment online using your bank account for free. You can pay online via credit card via ACI Payments (formerly Official Payments) for a fee. You can pay by mailing a check, money order, or cashier’s check, or pay in person at a field office. EFT payments may be used for bank and corporation tax payments.
Do I Pay the Franchise Tax if I Don’t Have a Franchise?
The word “franchise” is often used in conjunction with franchise business opportunities like restaurants or gyms. But in this context the California Franchise Tax covers businesses of many types. So, yes, many businesses located or doing business in California (except sole proprietorships and general partnerships, as mentioned earlier) must pay the annual franchise tax.
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Gerri Detweiler, a financing and credit expert, has been featured in 4,500+ news stories and answered 10,000+ credit and lending questions online. In addition to Nav, her articles have appeared on Forbes, MarketWatch, and Startup Nation. She is the author or co-author of six books, including Finance Your Own Business, and she has also testified before Congress on consumer credit legislation.