California Franchise Tax

by Joy Morgan in
California franchise tax

Source

At AbstractOps, we help companies with their back-office work. Many of our customers are California-based or doing business in California which means that every year they must file their California Franchise Tax and income tax return. 

The California Franchise Tax Board collects individual and business income tax. Almost every person who is making money in California has to give some to the state in order to protect themselves and their business from penalties. 

For start-up companies, it is essential to understand the what, who, where, when, and how of California Franchise Tax Filing to avoid financial penalties and remain in good standing. 

What is the California Franchise Tax?

The California Franchise Tax is a fee that nearly every company doing business in California must pay. The minimum fee owed is $800 but who has to pay and how much they pay varies according to the company's year and location of incorporation, business income, and entity type. Companies also need to file the associated California income tax return for their business.

  • The income tax return form for C-Corps is Form 100
  • The business index on the California Franchise Tax Board website lists which income tax return form a business may need to file for other entity types. We encourage our clients to file this return with their accountant. Details on where to file below. 

Who is required to pay the California Franchise Tax?

Any entity doing business in California is required to pay the California Franchise Tax and complete the California income tax return.

Be sure to file if you are doing business as described by any of the below:

  • Incorporated in California
  • Registered to do business in California with the Secretary of State
  • Receiving California source income
  • Permanently residing in California (or have a headquarters in CA). 
  • 25% of your employee payroll goes to CA residents or payroll for CA residents amounts to $61,040 or greater that tax year. 
  • California sales are 25% or more of total business sales or amount to $610,395 or greater that tax year.

Above figures cited for the 2020 tax year 

Many of our startup customers are DE C-Corps but they do business, as described above, in CA. This means they will still need to file the California Franchise Tax and income tax return.

How to avoid the California franchise tax?

man holding banknote

Newly Incorporated or Qualified Corporations with $0 in CA revenue will not have to pay the franchise tax in their first year.

The CA Franchise Tax owed for your corporation's first tax year is calculated by multiplying the relevant tax rate by your corporation's California net income. The minimum $800 tax rule does not apply in the first tax year so you will pay whatever the result of that equation is.

Therefore, if your corporation's CA income in that first tax year of incorporation is $0 you will not owe the franchise tax in your first year. If your income x the tax rate is any number over $0 however, you will need to pay that amount. The beauty of the rule in the first year though is that if the number is below $800 you only pay that amount.

For any years you are doing business in California after the first tax year of incorporation, you will need to pay $800 at a minimum, regardless of if the corporation's revenue multiplied by the tax rate is below that figure.

No matter the amount of your revenue in that first year you will still need to file your CA income tax return.

You do not need to file the California Franchise tax if you meet both of these conditions

  • You incorporated within 15 days before the end of the calendar year (12/15)
  • You did not do any business in that 15 day period (did not hire anyone or make money, etc)

Example: if you incorporate in California on 12/17 but hire someone in that 15 day period you still need to pay the California Franchise Tax annual minimum ($800). In this instance, you should also file the CA income tax return even if your income is $0 for this year. 

There are other instances that may make your business tax-exempt or eligible for special treatment. You can review these instances on the California Franchise Tax website here.

When is California franchise tax due?

The California Franchise Tax is due "the third month and 15th day after the beginning of the accounting year" (CA Due Dates Source) in normal people terms, March 15th.

For C-Corps the related income tax return Form 100 is due “on or before the 15th day of the 4th month after the close of the taxable year” aka April 15th. 

You can stay up to date on COVID-related tax relief and deadline extensions on the California gov website.

How to pay franchise tax in California?

You must be registered with BizFile California in order to pay the CA Franchise Tax. Then you can pay the tax here

  • You need to ensure you are registered with BizFile California because you are granted a unique CA entity number for your business after registering. You will need that entity number from BizFile to complete the Franchise Tax filing.
  • Not sure if you already registered? You can enter your corporation name here to find out if you are registered yet. 
  • If you are not yet registered you can do so by following the steps listed here.
  • Once you confirm that you are registered with BizFile California and have your entity number on hand you can pay the Franchise Tax.
  • We encourage you to hire a tax accountant to complete the State income tax return for you. 

Where can I make the payment?

  • Pay the California Franchise Tax online here.
  • E-File your income tax return here
  • You can also submit your income tax return and CA Franchise Tax by mail. More information on where to mail this to can be found here

What is the California minimum franchise tax?

  • The California Franchise Tax minimum payment is $800.
  • If you are a high-earning corporation your tax amount may be higher.
  • The amount due is calculated by applying the applicable tax rate to your corporation's net income (this number can be found on the company’s income statement). For C Corporations that rate is 8.84%. For early-stage companies, the amount is often less than $800 but CA state still requires the full $800 as a minimum tax for operating there. 
  • The applicable rate varies by entity type see the below table for more information.
  • Corporations other than banks and financials: 8.84%
  • Banks and financials: 10.84%
  • Alternative Minimum Tax Rate (AMT) rate: 6.65%
  • S corporation rate: 1.5%
  • S corporation bank and financial rate: 3.5%

California Business Tax Rates Table (2021)

In summary...

  • We recommend checking with your accountant to see if your minimum filing cost is $800.
  • Ensure you file Form 100 for the State income tax return if you are operating a C-Corps. Otherwise, check the filing requirements for other entity types and ensure you are compliant!

There are a variety of penalties and fees if you do not file or file inaccurately or late. Please review the potential fines directly on the California website.

We can help!

At AbstractOps, we help early-stage founders streamline and automate regulatory and legal ops, HR, and finance so you can focus on what matters most.

If you're looking for help on the California Franchise Tax, drop us a note at hello@abstractops.com.

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Note: Our content is for general information purposes only. AbstractOps does not provide legal, accounting, or certified expert advice. Consult a lawyer, CPA, or other professional for such services.

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