{"id":1057,"date":"2014-08-18T08:00:51","date_gmt":"2014-08-18T08:00:51","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=1057"},"modified":"2015-05-18T20:13:09","modified_gmt":"2015-05-18T20:13:09","slug":"primer-on-california-s-corporation-taxation","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/primer-on-california-s-corporation-taxation\/","title":{"rendered":"Primer on California S Corporation Taxation"},"content":{"rendered":"
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A California S corporation can dramatically lower your individual tax bill.<\/figcaption><\/figure>\n

You can get extremely detailed information about how California taxes both in-state and out-of-state S corporations from the California Franchise Tax Board instructions for completing the California 100S tax return \u00a0(click here<\/a> to get that). But I thought I\u2019d do a quick, nutshell overview of how California taxes S corporations for this week\u2019s blog post.<\/p>\n

Especially for out-of-state S corporations, the rules and accounting take some getting used to.<\/p>\n

Furthermore, many out-of-state businesses probably can arrange their operations to minimize the minimum S corporation tax and to eliminate the requirement that individuals who reside outside of California pay California state income taxes.<\/p>\n

Understanding the California S Corporation Tax<\/h2>\n

Okay, so the first thing to know: California assesses a franchise tax equal to whatever amount is larger: $800 or a 1.5% franchise tax on the S corporation’s income.<\/p>\n

An S corporation that makes, for example, $100,000 in profits pays $1500. This makes sense, right? The S corporation pays the larger value: 1.5% of $100,000 which equals $1500\u2026 or the minimum S corporation franchise tax which equals $800.<\/p>\n

Another example: An S corporation that makes $10,000, for example, pays $800. Why?\u00a0\u00a0The S corporation pays the larger value: 1.5% of $10,000 which equals $150\u2026 or the minimum S corporation franchise tax which equals $800.<\/p>\n

Understanding S Corporation Shareholder Taxation<\/h2>\n

Here\u2019s the next thing to know: When the S corporation allocates its profits to the shareholders, that allocation means that shareholders need to pay California income taxes on the allocated profits.<\/p>\n

For example, if a California S corporation with one shareholder makes $100,000 for some year, the shareholder receives a K-1 showing his or her share of the S corporation profit as equal to $100,000. Because this income gets sourced, or \u201capportioned,\u201d to California, the shareholder pays California state income taxes on the $100,000.<\/p>\n

One other quick note: If the shareholder lives in some other state\u2014say Washington State\u2014California can still tax the shareholder because the $100,000 of income was earned in California.<\/p>\n

Out-of-state S corporations<\/h2>\n

Another quick point: California can’t tax a corporation that operates entirely out-of-state.<\/p>\n

In other words, California can’t tax some corporation that operates in, say, Washington State. Even if the business is delivering some Washington-produced products to some customers or clients in California.<\/p>\n

Furthermore, if an out-of-state corporation has a sales person inside California and that sales person only solicits orders for sales of personal property, California basically can’t tax the corporation and can’t tax shareholders either. (A federal law, Public Law 86-272, protects you in this special situation. You probably don’t want to look at this, but if you’re interested, you can click here<\/a> for a long-winded Franchise Tax Board discussion of how California addresses Public Law 86-272)<\/p>\n

Note:<\/strong> In the special case where an out-of-state S corporation does have a sales\u00a0person inside California, the corporation should pay the $800 minimum S corporation tax.<\/p>\n

But an important caveat: If an S corporation does basically anything<\/em> else, California can probably assess the franchise tax on the S corporation and possibly an income tax on its shareholders.<\/p>\n

For example, any of the following activities conducted by an out-of-state S corporation inside of California will mean that California gets to hit the S corporation with the franchise tax and the shareholders with a state income tax:<\/p>\n