California has some of the highest business taxes in the US. It’s important to choose your small business structure wisely to reduce your tax burden. Taking advantage of tax saving strategies will also help minimize how much you owe.
Corporate tax
California has a flat corporate tax rate of 8.84%. This tax applies to corporations and LLCs that chose a corporate taxation structure. A business’s net taxable income is subject to the corporate tax.
Shareholders don’t get much of a tax break either. California taxes shareholders 13.3% on their dividends.
Franchise tax
Most corporations in California don’t have to pay franchise tax. It’s when a C corporation doesn’t have to pay corporate tax because of a loss that it must pay franchise tax. Other types of business that are subject to franchise tax are LLPs, LPs, LLCs and S corporations.
Double taxation
Depending on your small business’s formation, it may go through double taxation. If you were to structure your small business as an LLC or an S corporation, then you may go through double taxation. California taxes these types of businesses for both business and personal income rather than just the initial business income. It’s possible for your taxes to double from double taxation.
Alternative minimum tax
C corporations are subject to alternative minimum tax, which is 6.65%. Alternative minimum tax limits a business’s ability to write off expenses to lower their corporate taxes. Just as with the other types of taxes, California’s business law also imposes this tax on LLCs that chose a C corporation business structure.
Sole proprietorships
California taxes sole proprietorships the same as individuals plus a federal self-employment tax of 15.3%. Sole proprietorships may also take deductions for business expenses. You must check your income bracket to know what your tax rate would be.