When you open a business in California, there’s one agency with which you need to get familiar pretty fast: the California Franchise Tax Board (FTB). You might even want to bookmark that page. As you establish your business in the Golden State, you’re going to be dealing with them regularly.
Even if you’re not founding your business in California, you might still need to interact with the FTB. Specifically, you’re subject to their tax laws if you do business in the state, which means your startup “engages in any transaction for the purpose of financial gain within California.” You could also be subject to FTB taxes if your California sales exceed a certain threshold or you pay a certain sum in payroll to Californians. To help you determine if your startup needs to register to do business in California, check out this resource from the FTB.
All told, if you operate, sell, or pay employees in California, you need to understand the taxes in the state. It’s not all bad news, too. While you will be subject to a minimum franchise tax, you might also be able to claim one or more tax credits.
So, whether you’re founding a startup in California or you’re establishing a nexus in the state, let’s get into what you need to know.
Registering to do business in California
If you need to register with the FTB, you’re probably wondering what, exactly, that entails.
First, you need to decide which entity type you’re going to pick for your startup. In California, the choices are:
- Corporations (including nonprofits)
- Limited liability companies (LLCs)
- Limited partnerships (LPs)
- Limited liability partnerships (LLPs)
We generally recommend that tech startups register as corporations. To get a better look at what that means, you can dig into our guide.
Next up, it’s time for paperwork (you knew it was coming). Make an account in the California Secretary of State (SOS) bizfile online portal. Then, from the left-hand panel, choose “Forms.” There, you’ll see a variety of options to start different business types. Choose the right one for the entity type you picked for your startup and file it. Fees range from $70 to $100 for for-profit businesses, although you’ll need to pay an extra $5 if you want a certified copy.
This is the main step of the process, but you might need to finesse it depending on your startup. Some companies need to register a fictitious business name, for example. The SOS has a step-by-step guide you can use to help you think through all the necessary steps to register your startup in California.
To ensure you get the nuances of your situation handled correctly, we recommend working with an attorney or an accountant to choose your entity type and register your business.
Taxes and deadlines
Across the state, C corporations have a standard tax rate of 8.84%, and S corporations get taxed at 1.5%. That’s assuming you report a profit.
If you operate at a loss, though, you’re not off the hook entirely.
All California corporations are also subject to an $800 minimum franchise tax. That’s true even if you’re inactive or operating at a loss. The good news? You’re not subject to this tax for your first year.
After the first year, even if your startup doesn’t turn a profit, you’ll still need to pay at least $800 in California taxes. This is due by April 15 every year. The great and unique thing about CA taxes is that your required to pre-pay for the year, so for example, for tax year 2022, the $800 fee would be due by April 15th, 2022. You’ll file it with Form 100. The FTB increasingly requires electronic payment. To pay your state taxes online, you’ll use their webpay portal.
If you have employees, you’ll also be subject to state employment taxes, which gets administered by the Employment Development Department (EDD). To get a better idea of which California taxes apply to your startup, you can explore this guide.
Estimated tax deadlines
Once your startup makes it past operating at a loss, you’ll use Form 100-ES to file your quarterly estimated taxes or submit them online.
Note that the Golden State does things a little differently. While they do still require quarterly estimated tax payments, you get to skip Q3. To clarify, the requirements per quarter are:
- Q1: 30% due by April 15
- Q2: 40% due by June 15
- Q3: 0% due by September 15 (this is the one you can skip)
- Q4: 30% due by January 15 of the following year
The CA R&D tax credit
The Golden State offers an R&D tax credit modeled after the federal one. If you need a refresher there, we’ve got you covered.
Generally speaking, the activities that qualify for the tax credit on a federal level will also qualify you for a California tax credit. The amount you can receive is the sum of:
- 15% of qualified expenses that exceed a base amount
- 24% of basic research payments that exceed a base amount
To calculate your base amount, you first need to figure out your base percentage. That’s equal to the percentage of your gross income that you spent on qualified research expenses in the last three years, with a cap of 16%. You then multiply that percentage by your average gross for the last four years.
That’s a general overview. You can dig further into the details here, or our team can help you assess how much your startup could receive from this California tax credit. We can also help you figure out if you apply for other credits, like the California Competes Tax Credit.
Local requirements across California
California’s a big state. A lot of counties and municipalities have specific tax laws that could apply to your startup, so be sure to review what’s pertinent to you based on where you establish your business location(s).
San Francisco, for example, has specialized filing requirements. If you operate out of San Francisco county, you’ll be subject to their gross receipts tax.
Ultimately, if you plan to establish a nexus in California, don’t hesitate to loop in our team of state and local tax (SALT) experts. Not only are we experienced in helping tech companies comply with their tax liability, but we’re also seasoned in seeking out and maximizing tax credits to help your startup grow.
For help establishing your new company in California, understanding the applicable taxes, and setting up your startup for success, we’re here. Contact our California tax experts at ShayCPA today.