California Business Income Tax: Everything You Need to Know

The California business income tax must be paid by all businesses that operate in this state.3 min read

The California business income tax must be paid by all businesses that operate in this state. The amount a business must pay in income taxes depends on several factors, including the business's earned income and entity type.

Getting an Income Tax Extension

In certain circumstances, it may be possible to get an extension for your California business income tax. A business's ability to get an extension depends on its entity type. Companies file electronically for tax extensions. Businesses operating as a sole proprietorship must apply for an extension based on personal tax laws instead of business tax laws.

A California corporation must pay its business income tax by the third month after its tax year has ended. The due date is the 15th of the third month. For example, if a corporation bases its tax year on the calendar year, its income tax is due on March 15. Corporations that are in good standing with the Secretary of State and Franchise Tax Board receive an automatic tax extension of seven months. Corporations in good standing do not need to request this extension in writing.

It's important to understand that a tax extension provides a later due date for the tax return and not payment of the tax balance. Therefore, a corporation that qualifies for the seven-month extension and uses the calendar year as its fiscal year would be able to file its return on Oct. 15, but would still need to pay its income tax by March 15. A corporation that plans to make use of this extension can pay its taxes using Form FTB 3539.

There are three types of partnerships that must pay their business income tax on the 15th day of the fourth month:

  • General partnerships.
  • Limited partnerships.
  • Limited liability partnerships.

Partnerships can take advantage of an automatic six-month tax extension without making a formal written request. As with corporations, the tax extension for partnerships applies only to returns and not tax payments. Partnerships should use Form FTB 3528 to pay their taxes when taking advantage of the automatic extension.

Limited liability companies (LLCs) must also pay their income taxes on the fourth month after the end of the tax year and can receive an automatic six-month tax extension. An LLC is only eligible for this extension If it has not been either suspended or forfeited.

More About the Business Income Tax

Doing business in California can be more expensive than you might think, especially if you're running a small business. The income tax for both business and personal income in California is higher than in other states, and many businesses are also subject to double taxation.

The Franchise Tax Board administers the business income tax in California. In most cases, the rules of the Franchise Tax Board are the same as those of the IRS, but this is not true in all circumstances.

Pass-through entities, which include both LLCs and S corporations, must pay both personal and business income taxes. Many small businesses operate as pass-through entities, and in California, their tax burden will be higher than in other states. At the federal level, pass-through entities are not subject to double taxation.

Because of this tax rule, a pass-through entity's tax burden can almost double, based on several factors, like the entity's net income and how much personal income the owner earns from the business. Because of California's high taxes, business owners must carefully consider the pros and cons of establishing a business in this state.

C corporations are one of the most common types of business entity in California. These businesses are subject to many taxes, except the self-employment tax. C corporation owners must pay taxes on any dividends distributed by the corporation. In some cases, the tax rate on these distributions can be as high as 33 percent. Other types of personal income originating from the corporation are also subject to taxation. C corporations do offer the benefit of income splitting, but they also make owners who receive dividends subject to double taxation.

Corporations are the most complex legal entities from the standpoint of taxes and accounting. Sole proprietorships, partnerships, and LLCs are much simpler entities. The corporate tax rate in California is 8.84 percent, and C corporations must pay their taxes in installments. 30 percent of corporate taxes are due by April 15, 40 percent by June 15, and the remaining 30 percent by Dec. 15.

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