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California LLC Taxes: The Complete Guide
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California LLC Tax: Essential Insights And Requirements
Every LLC operating in California must fulfill its obligation to pay specific taxes and fees on an annual basis. The California Franchise Tax Board classifies LLCs in the state as partnerships, corporations, or disregarded entities. For the purposes of this guide, we will assume that an LLC has not sought to change its tax status and will be treated as a partnership, which is the default tax status for LLCs.
Please be aware that California LLC taxes are a complex matter. This guide is not intended to serve as tax advice, but rather as a general outline of the tax and fee requirements applicable to limited liability companies in California. For more information about California LLCs, contact our Los Angeles LLC lawyer at EJP Law, P.C., P.C. today.
Doing Business As An LLC In California
If your California LLC has engaged in business activities within the state for at least one day during the year, you will be obligated to pay the California Franchise Tax. Starting from January 1, 2011, an LLC is considered to meet the state’s “doing business in California” criteria if it performs any of the following actions:
- Your LLC is incorporated or commercially based in California.
- The total sales of your LLC, which includes sales made by agents and independent contractors, surpass either $536,446 or 25% of your LLC’s overall sales.
- The value of your LLC’s real property and tangible assets in California surpasses either $53,644 or 25% of your LLC’s total real property and tangible assets.
- The compensation paid by your LLC in California exceeds either $53,664 or 25% of the total compensation paid by your LLC.
California Franchise Tax LLC Exemption
In 2020, the state legislature of California introduced a bill that grants certain businesses an exemption from paying the California Franchise Tax during their initial taxable year. California-based LLCs, LPs, and LLPs established between January 1, 2021, and December 31, 2021, are not obligated to pay the California Franchise Tax for their first taxable year. However, these businesses will commence payment of the California Franchise Tax during their second taxable year of operation. For additional details, please refer to California Assembly Bill 85.
California LLC Annual Franchise Tax
In California, all entities, including California LLCs, are required to pay the state’s annual Franchise Tax. This tax amounts to $800 for every California LLC.
The annual Franchise Tax must be paid by the 15th day of the fourth month following the start of the tax year. To complete the payment, you need to submit Form 3522 (California LLC Tax Voucher). Please note that a late fee will be applied if the Franchise Tax is not paid on time.
If you choose to mail your payment, ensure that you file the appropriate form separately from Form 568. It is not recommended to include the Franchise Tax payment with your Form 568. Alternatively, you have the option to file online. However, please be aware that online payments are subject to a 2.3% convenience fee.
California LLC Fee
In addition to the Franchise Tax, California also imposes a yearly LLC Fee. However, this fee only applies to LLCs with an annual income of $250,000 or more. If your annual income falls below this threshold, no fee is owed. For LLCs with an annual income equal to or exceeding $250,000, the fee is as follows:
To ensure compliance with tax regulations, it is important to estimate and make a payment for the annual fee by the 15th day of the sixth month of the current taxable year. The appropriate form to use is the FTB 3536 (Estimated Fee for LLCs). Failure to accurately estimate and pay the fee may result in penalties. These penalties amount to 10% of the outstanding balance owed by your LLC for the year.
LLC Income: Form 568
Annually, your California LLC is required to submit an LLC Return of Income (Form 568). This filing encompasses your California LLC tax and LLC Fee, although you won’t make the actual tax payments here. You can think of Form 568 as a comprehensive tax document that lists and tracks all your LLC’s income, taxes, overages, withholdings, and more. Below is some of what’s listed on Form 568:
- Total LLC Income
- LLC Fee
- Annual California LLC Tax
- Non-consenting Nonresident Members’ Tax Liability
- Over-payment From Previous Years
- Withholding
- Deductions
- Use Tax
- Refunds
- Value of LLC Assets, Liabilities, and Capital
- Property Distributions
- Beneficial Interests in a Trust
- Ownership of Additional Businesses
- Income Deferment
- Tax Credits
- Members’ Shares of Income, Deductions, Credits
Frequently Asked Questions
How Are LLCs Taxed In California?
Every Limited Liability Company (LLC) that operates or is organized in California is required to pay an annual tax of $800. This tax is applicable every year until you officially cancel your LLC, even if you are not actively conducting business. The deadline to pay your first-year annual tax is the 15th day of the 4th month from the date you file with the Secretary of State (SOS).
How Are California LLCs Taxed As S-Corp?
Choosing S-corp status can offer significant benefits to certain LLCs. S-corps are exempt from corporate income tax and allow for member distributions that are not subject to the 15.3% self-employment tax.
To elect for S-corp status, your LLC needs to file IRS Form 2553. Before submitting the form, it’s crucial to review the IRS S-corp requirements to ensure that your LLC meets the necessary criteria. Keep in mind that only US-based companies with specific limits on shareholders and stock can qualify as S-corps. Additionally, it might be wise to consult with a CPA beforehand to determine whether opting for the more intricate S-corp tax filing (via IRS Form 1120-S) will genuinely result in cost savings, as not all LLCs will benefit from S-corp status in terms of California LLC tax.
How Are California LLCs Taxed As C-Corp?
While it is not very common, there are LLCs that opt to be taxed as C-corps, which is the default tax status for corporations. One disadvantage of C-corps is the issue of “double-taxation,” where the company is required to pay federal corporate income tax at a rate of 21% and the California corporate rate of 8.84%, while shareholders are also taxed on dividends. However, C-corps enjoy a wider range of tax benefits compared to default LLCs or S-corps, which makes them more appealing to investors. Consequently, some LLCs find it beneficial to elect C-corp status.
If you are considering filing for C-corp tax status with the IRS (Form 1120), we strongly recommend consulting with a CPA to determine if the change will be advantageous for your LLC.
Do LLCs Pay Income Tax In California?
Limited liability companies (LLCs) provide appealing federal tax advantages. However, LLCs operating in California are subject to an annual franchise tax of $800, in addition to an LLC fee based on gross receipts. This comprehensive guide elucidates the intricacies of California state tax regulations for LLCs, including applicable exceptions and instructions for payment.
Do You Have To Pay The $800 California LLC Fee In Your First Year?
Many California business owners are wondering, when is the deadline for my California LLC franchise tax payment? If your California LLC is formed between January 1st, 2021, and December 31st, 2023, there is no requirement to make an $800 payment in the first year. The initial $800 payment is due in the second year of your LLC’s existence.
Do Foreign LLCs In California Need To Pay California Taxes?
Yes, even if your business is a foreign LLC operating in California but registered outside the state, it is still necessary to fulfill all California LLC tax obligations. This includes the payment of applicable taxes such as the annual franchise tax and LLC fee. Ensuring compliance with these requirements is crucial to maintain a smooth operation within the state.
What Is Tax-Deductible For An LLC?
One of the benefits of running a business is the ability to deduct legitimate business expenses, reducing the taxable amount of your business’s earnings. By accurately reflecting the net profit, these deductions provide a more precise financial picture. These expenses may encompass:
- Start-up costs
- Automobile and travel
- Equipment costs
- Advertising and Promotion
- Business Supplies
- Rent and Depreciation on Equipment
- Software Subscriptions
- Taxes
- Employee Salaries and Benefits
- Legal Fees
How Can An LLC Avoid Property Tax Reassessment In California?
If the individuals and the legal entity have equivalent proportional ownership interests, the real property will remain unchanged when transferred between them. For instance, A and B can transfer property they jointly own to an LLC they jointly own without triggering reassessment.