A franchise tax is a special form of tax in California levied on most entities doing business in the state. It applies to most entity structures regardless of their income level.
Let us discuss what is California Franchise Tax, how to file it, and what are the important due dates for it.
What is Franchise Tax in California?
The franchise tax is a special tax levied by the Secretary of State in California on most businesses. It is a type of privilege tax that is collected by the State of California for allowing businesses in its jurisdiction.
The franchise is not directly linked to the income of a business. However, the franchise tax rate is affected by the level of income of a business in California. This tax is collected separately from state or federal taxes.
The Franchise Tax Board (FTB) is responsible for collecting this tax in California.
Unlike the name suggests, it is not a tax collected from a franchise or applied by the franchiser. It is a state tax collected by several states in the US from businesses registered within their geographical boundaries.
Franchise Tax Rate in California
Most businesses in California need to pay the franchise tax. The franchise tax is payable at different rates for different entity types with a minimum payable amount of $800 that applies to most small businesses.
Sole proprietorship and General partnership entities do not need to pay a franchise tax in California. Their corporate income is taxed at the individual level and not taxed at the entity level.
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) pay a fixed franchise tax of $800 annually.
C Corporations reporting a taxable income also do not pay any franchise tax in California. However, if the C Corporation does not report any income or business activity, it will still be liable to pay the minimum franchise tax of $800.
S Corporations will have to pay the franchise tax at 1.5% of the taxable income or $800 whichever is higher for the fiscal year.
Limited Liability Companies (LLCs) pay a minimum of $800 franchise tax in California. Their franchise tax varies by income level:
- Income from $250,000 to $499,999 pay $900 tax
- Income from $500,000 to $999,999 pay $2,500 tax
- Income from $1,000,000 to $4,999,999 pay $6,000 tax; and
- Income of $5,000,000 or more pay $11,790 tax.
Franchise Tax Exemptions in California
Some businesses can claim exemptions from certain state and federal taxes including the Franchise tax in California.
Here are a few situations where businesses do not need to pay the franchise tax in California.
First Year of Business Exemption
Most small businesses do not report net income in their first few years. Therefore, the State of California has exempted new businesses from the franchise tax in their first business years in the state.
Instead, it charges a franchise tax on the income level of all businesses for the first year which is almost always lower than $800 for most small businesses.
The 15-Days Rule
If a business is registered 15 days before the end of a tax year and does not conduct business activities during these days, it does not need to pay the franchise tax for that year.
Tax-Exempted Entities
Not-for-profit entities and other organizations applying for tax-exempt status with the State of California also do not have to pay the franchise tax.
These entities do not pay income and other business taxes either.
Sole Proprietorships
Sole proprietorships are not taxed at the entity level. So, they do not need to pay the franchise tax in California.
Note: C Corporations without any income or business activities also do not pay the franchise tax. All other entities must pay the franchise tax in California.
How and When to Pay Franchise Tax in California?
There are three ways to file for franchise tax with the Franchise Tax Board (FTB) California.
The easiest way to file taxes with the FTB is to register and file online. You can visit the FTB online portal to register your business and file tax returns there easily.
Then, you can download relevant tax forms for your entity type and complete them manually. You can then file taxes with the FTB by mail.
Finally, some qualified businesses can file taxes in-person with the FTB through its office locations as well.
The filing requirements for corporations in California include:
- Registered (incorporated) in California.
- Doing business in the state.
- A source of income in California.
- Registration with the SOS California.
- Corporations file the franchise tax form or Form 100.
- LLCs will use Form FTB 3522 to file their franchise taxes.
An LLC and other entity types must also be registered with the SOS California. These businesses should have an income source in California to file for taxes with the FTB too.
The due dates to file for the franchise taxes for LLCs, Partnerships, LP, LLP, and S Corporations are:
- 15th day of the 3rd month after the close of your tax year.
- An extension period of six months is available.
- There is no Annual Fee for these entities in California.
The due dates for C Corporations and Single-Member LLCs (non-pass through entity) are:
- 15th day of the 4th month after the close of your tax year
- Extension available: 15th day of the 10th month after the close of your tax year.
- An Annual Fee depending on the business income level with the same due dates.
Entities with an exempt status can file with the same deadlines with the FTB California using their relevant Form 100s or Form 199s.
Corporate Taxes in California
Most businesses in California have to pay three types of taxes on their corporate income including income tax, alternative minimum tax, and franchise tax.
Some businesses selling goods and services also need to pay the sales and use tax in California. Businesses must file these corporate taxes with the relevant state authorities in California.
Corporate, Estimated, and Alternative Minimum Taxes in California
The State of California imposes a flat corporate tax of 8.84% for most businesses. This rate applies to C Corporations and LLCs elected as corporations.
S Corporations must pay a corporate tax of 1.5% in California. Other businesses pay the alternative minimum tax at 6.65% wherever applicable.
Businesses must make estimated quarterly income tax payments to their respective state departments as well as to the IRS when applicable.
Sales and Use Tax with the CDTFA
The California Department of Tax and Fee Administration (CTDFA) collects the sales and use taxes in California.
The statewide sales tax rate is 7.5% in California while some counties and local authorities have imposed additional sales taxes of 0.10% to 1.0%.
Franchise Tax with the FTB
As listed above S Corporation pay the franchise tax at 1.5% or $800 whichever is higher. Most entity types pay franchise tax with a flat fee of $800.
The Franchise Tax Board (FTB) is responsible for imposing and collecting the franchise tax in the state of California.
Income and Estimated Taxes with the IRS
Apart from state taxes, businesses may have to file and pay federal taxes as well. All businesses must register with the Internal Revenue Service (IRS) even if they do not report taxable income.
However, businesses do not need to pay double taxes on their income to the state and federal tax authorities. Their tax rates with the higher slab would be adjusted against the lower of the state or federal tax rates.
Franchise Tax for Multi-State Businesses
A new business entering California may be registered in one or many other states in the US as well. However, the franchise tax is still applicable to these multi-state businesses in California.
As mentioned above, if any business has a source of income in California state, it must pay corporate and franchise taxes. The exact tax treatment on the net income of a business will depend on where the headquarter of the company is located and how it deals with its corporate income.
Generally, any business conducting business activities in California has to pay the franchise tax regardless of its income level.
