Secrets of $800 Franchise Tax Board Surprise

There are many things to love about starting a business in California, and a few taxes you should love, too, that can get you off to a flying start. The most frequently asked about is California’s annual $800 franchise tax, which is enforced by the Franchise Tax Board (FTB).

This tax affects many LLCs and corporations, even if they are not profitable. Knowing the answer to these questions can make the process of paying the bill and avoiding penalties easier. Look for professionals (like Los Angeles California tax attorneys) who can help you in the right direction.

What is the $800 California Franchise Tax?

In general, LLCs operating in California or registered with the Secretary of State are required to pay an annual $800 tax. The obligation may extend even if the LLC itself has little or no income, be in a loss, or is not yet profitable.

Corporations can also be subject to an $800 minimum franchise tax. In California, it’s typically the duty of corporations incorporated, registered, or conducting business in the state to pay it.

The $800 payment should be viewed as a running expense of your business, rather than just a payment for profit taxes.

In What Month of the Year is the $800 Tax Due?

The LLC annual tax is usually due on the 15th day of the fourth month after the start of the taxable year. That typically happens on the 15th of April for an LLC that operates on the calendar year. The payment is made on an FTB Form 3522.

The minimum franchise tax for a corporation is usually due in the first quarter of the accounting period.

Failing to make the deadline could lead to penalties and interest, so it is especially vital for new business owners to keep track of deadlines.

Do You Have A First-Year Exemption?

Here’s where entrepreneurs must be extra cautious.

Currently, California exempts newly incorporated or qualified corporations from paying a franchise tax in their first year of incorporation. The exemption may be generally available for the first taxable year of a C corporation’s or S corporation’s existence (as subject to the rules).

There are exceptions for LLCs. The broad exemption for LLCs, LLPs, and LPs applies for the first year in taxable years beginning on or after January 1, 2021, and before January 1, 2024. It is not an exemption for existing LLCs that were created before today.

However, a big event is coming up soon: For taxable years starting on or after January 1, 2027, and before January 1, 2030, qualifying LLCs, LLPs, and LPs will enjoy a $400 reduction in their first-year annual taxes. Once you have hired an expert (like a tax attorney in San Diego CA) you don’t need to worry much.

Don’t Confuse the Tax with the LLC Fee

The $800 tax per year is in addition to the California LLC fee. If the income of the LLC exceeds $250,000 and the LLC has California income, an additional fee exists, which varies depending on income: $900 for an LLC with less than $10,000 in California income, up to $11,790 for an LLC with more than $100,000 in California income.

For New Entrepreneurs, Here Are A Few Tips

1. Add the franchise-tax deadline to your business calendar right after the business is formed.
2. Even if your company foresees a loss, plan for the $800 payment.
3. Before assuming the rules for the first year, find out if your entity is an LLC, an S corporation, or a C corporation.
4. Be aware of California income tax due on an LLC since it might be subject to another annual charge.
5. Make sure to update your Secretary of State and FTB records.
6. Do not select an entity type for tax purposes only without the advice of a tax advisor.

The California franchise tax of $800 can be a surprise to a new business, particularly if the business doesn’t have much revenue. By understanding the entity rules and deadlines from the outset, this is an ongoing requirement that can be handled more effectively – and help you avoid avoidable penalties.