|California Basic Business Taxes 2012
|California's economic development, finance and tax organizations provide a range of incentive programs to initiate new business and commercial investment. Specific programs include single sales factor taxes, property taxes, and sales and use taxes.
Area Development Research Desk (2012)
Small Business Loan Guarantee
California Small Business Loan Guarantee Program: Allows a business to not only
acquire a loan it could not otherwise obtain, but to establish a favorable credit history with a
lender so that the business may obtain future financing on its own.
Eligible Applicants: Any small business as defined by the U. S. Small Business Administration (typically businesses that employ one hundred people or less).
Eligible Uses: Proceeds must be used primarily in California and for any standard business
purpose beneficial to the applicant's business, such as expansion into new facilities or purchase of new equipment.
Guarantee Amount: Guarantees can cover up to 90% of the loan amount, with the guaranteed
portion of the loan not exceeding $500,000. The guaranteed percentage varies and subject to negotiation between the FDC and the lender.
The term of the loan guarantee may extend up to
• Interest rates are negotiated between the borrower and the lender. The FDC may charge a guarantee fee of up to 2% for guarantee amounts up to $150,000, and 3% for guarantee amounts over $150,000, plus a documentation fee of $250.
• Processing time takes three to five weeks, depending on how quickly the applicant provides the necessary information and documentation, and on the lender's responsiveness.
• Collateral is generally required, but each transaction is tailored to meet the borrower's financial situation. Collateral is generally required, but each transaction is tailored to meet the borrower's financial situation.
Market Development and Expansion Grant Program:
The Department of Conservation provides up to $20 million annually to increase beverage container recycling in California and to improve processing and manufacturing with recycled aluminum, glass and plastic. It encourages projects that advance environmentally and economically sustainable containers, packaging and other products. The program supports research and development of new technologies and helps reduce greenhouse gas emissions by strengthening green industries in the state.
Specific objectives include:
• Creating market opportunities for new sustainable products or packaging.
• Expanding market-related activities for existing recycled-content products.
• Improving the quality and supply of beverage container material feedstock for use in manufacturing sustainable products or packaging.
• Creating market opportunities for sustainable beverage packaging.
For more information, visit www.conservation.ca.gov/dor/grants/Pages/rmdeg.aspx
Beverage Container Recycling Grant Program:
The Department of Conservation provides funding annually in the form of grants for beverage container recycling and litter reduction programs. The Department typically seeks projects that provide convenient beverage container recycling opportunities in California. However, the focus may change with each new solicitation. Grant proposals are evaluated on criteria set forth in each year's Grant Solicitation. There are no restrictions on who can apply for the grants. For more information, visit the Department of Conservation's website or call 1-800-RECYCLE.
Beverage Container Recycling Infrastructure Loan Guarantee Program:
The Department of Conservation provides continuous funding in the form of loan guarantees for up to $10 million for capital expenditures for new infrastructure that would add recycling capacity, re-use and/or remanufacture beverage container materials into new products. Uses: equipment costs, building and facilities, rent and utilities, travel, contractual services, salaries and benefits, other operating and non-operating costs. Private companies, non-governmental organizations, governmental agencies, manufacturers and trade associations are eligible to apply. For more information, visit the Department of Conservation's website at:
Recycling Market Development Zone Revolving Loan Program:
The Recycling Market Development Zone (RMDZ) Revolving Loan Program makes capital available for California manufacturers located in RMDZ's. The program provides direct loans to eligible businesses that manufacture recycled raw materials, produce new recycled products, or that reduce waste from the manufacture of a product. These loans promote market development for post consumer and secondary waste materials and divert waste from non-hazardous California landfills. Funds may be used to acquire equipment, make leasehold improvements, purchase recycled raw materials and inventory, or acquire real property. Applicants may borrow a maximum of 75 percent of the cost of a project, or $2 million. Terms are generally 10 years, and low interest rates are fixed.
SBA 504 Loans:
SBA (Small Business Administration) 504 loans are marketed, processed, closed and serviced by Certified Development Corporations (CDC). Through the SBA 504 Program, CDC's provide up to 90% of fixed-asset financing costs. The second mortgage, long-term, fixed-rate financing nature of the program allows banks to participate in business expansion by reducing risk exposure. The benefit to the borrower is a lower down payment requirement (10%) and a longer-term, fixed-rate loan, which translates into reduced monthly payments.
The maximum SBA debenture is $1,500,000 when meeting the job creation criteria or a community development goal. Generally, a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal.
Individual job goals can be somewhat flexible if the CDC's overall portfolio meets the requirements. At that point, community impact and public policy goals can be mitigating factors. Eligible 504 loan uses include the purchase of land, existing buildings, new construction, and the acquisition of machinery and equipment with a 10-year useful life. The private sector participant finances 50 percent of the project cost and takes a first lien on assets pledged as collateral.
The SBA takes a second lien on assets and finances up to 40 percent of the project cost, up to $1 million in some cases. Borrowers inject 10 percent in the form of cash or equity in real estate. For more information on SBA 504 loans, call the California Statewide Certified Development Corporation toll free at (800) 348-6258.
USDA Rural Development:
The U.S. Department of Agriculture sponsors "Business & Industry" guaranteed loans in rural communities. USDA guarantees up to 80 percent on loans from $750,000 to $5 million, and up to 70% on loans up to $10 million. Rates are fixed or variable and negotiated between lender and business. Terms are typically seven years for working capital, 15 years on equipment and 30 years on real estate. Lenders negotiate their own fees and the USDA charges 2% of the guaranteed amount as a one-time fee. Most types of businesses qualify, but the project must be in a rural area beyond the urbanized periphery surrounding a city of 50,000 or more. Communities that have grown beyond 50,000 since the 2000 census may still be eligible.
Local Revolving Loan Funds:
Enterprising communities throughout California have recognized that Revolving Loan Funds (RLF) are important economic development tools. The United States Economic Development Administration, Department of Agriculture, and Housing and Urban Development's Community Development Block Grant Program typically capitalize RLF's. Their proceeds often provide critical capital to deserving small businesses, which in turn provide needed jobs in urban and rural areas throughout California.
Certain businesses may be targeted for assistance and most often the loan will be provided as part of an overall package in the form of gap financing.
RLF's are guided by policies that outline loan or loan guarantee sizes, uses, rates, terms, special conditions and participation levels.
The goals, objectives and priorities of the program are weighed against the portfolio's requirements, and loans are approved or denied by a Loan Administration Board. Conventional lending is required, with the RLF taking a second or third mortgage position. Personal and/or corporate guarantees are required. Contact your local city or county for more information.
Various forms of financial assistance are available through local redevelopment agencies in California. Business may benefit through direct financial assistance, land assemblage, bond issuance and/or construction of public improvements. Redevelopment is funded through incremental property tax revenue increases that are a direct result of private investment and increased property values. Assistance may be in the form of fee reductions, infrastructure improvements, land cost reductions, mortgage interest reductions, rehabilitation/demolition/clearance of existing structures and utility tax rebates. Legislation enables the redevelopment agency to provide financing for manufacturing projects under certain conditions. Capital financing or long-term operating leases may also be permitted.
Corporation Income Tax
The Franchise Tax Board (FTB) administers an 8.84% tax (known as the Bank and Corporation
Franchise Tax) on net corporate income.
California S Corporations are subject to a tax rate of 1.5% on net income.
California uses the unitary method to determine the portion of income reasonably attributable to this state and thus subject to the Bank and Corporation Franchise Tax. Corporations deriving income from sources both within and outside the state are required to report the income of all related business units in a combined report. The combined income derived from all business activity is apportioned to each state or nation using an apportionment formula.
The percentage of property, payroll, and sales attributed to California, versus worldwide
operations, is calculated. They are then added together, with double weight given to sales, and
divided by four.
This calculation determines the percentage of the unitary or combined income subject to California's bank and corporation franchise tax.
Apportionment Formula = percentage of unitary income subject to California's corporate
California California California California
Payroll Property Sales Sales
( percent) + ( percent) + ( percent) + ( percent)
Multinational corporations may make a "Water's Edge" election whereby they exclude most income derived from foreign operations from the combined report. Foreign business units or
corporations that have an apportionment percentage in excess of 20% must be included in
the combined report. The election lasts for seven years, but is continuously renewed unless a notice of non-renewal is filed by the business.
Effective January 1, 2011 California businesses
have to option to select a Single Sales Factor. This allows companies to choose to weigh only
sales made in the state - not property or payroll -to determine corporate taxes owed.
Sales and Use Tax
Administered by the Board of Equalization, the State of California imposes a sales and use tax that is 7.25%. In addition local counties and cities can add a percentage to the State tax which is currently averaging 1.00%. The sales tax applies to the gross receipts of retailers from the sale of tangible personal property which is not specifically exempt. Specific exemptions include most food for home consumption and prescription medicine. Sales tax is imposed at the point of sale. It is the responsibility of the retailer, but paid by the purchaser. Use tax is paid on items purchased for the intent of use in California. Intent of use is defined as used in California within 90 days of purchase. The tax is self-reported and paid at the rate applicable in the jurisdiction in which the item will be used less the tax paid in another state.
Note: Construction materials are not exempt from sales tax and construction labor is not taxed.
County government levies and administers property taxes. The State Board of Equalization performs an oversight role relative to county assessors' activities. Property tax is levied on 100% of assessed valuation. The tax rate is 1% plus a component representing bonded indebtedness for the district in which the property is located on the lien date. The average property tax rate in
California is 1.1%, but varies on a parcel basis.
Real property is appraised upon change of ownership or new construction, and then adjusted annually at the lower of 2% or the rate of inflation as measured by the Consumer Price Index. Assessed values on real property may be reduced if the value is higher than the current market value.
Business personal property, including machinery, equipment, and fixtures is taxed at the same rate as real property, but is not subject to any special assessments. Unlike real property, business personal property is reappraised annually. Business owners must file a property statement with the county assessor each year detailing market value.
Finished goods and raw materials are not subject to property tax. Only finished goods held for use are assessed.
All employers are required to pay into the Unemployment Insurance Fund, which is used
to pay unemployment benefits. All new employers are required to pay a rate of 3.4% on the first $7,000 in wages for up to three years.
There is a maximum of $434 per employee, per year. (Calculated at the highest UI tax rate of
6.2% x $7,000)
The State Disability Insurance (SDI) withholding rate for 2011 is 1.2%. The taxable wage limit is $ 93,316 for each employee per calendar year. The maximum to withhold for each employee is $1,026.48. Administered by the California Employment Development Department, this is an employee paid tax.
Workers' Compensation Insurance
California's workers' compensation system is overseen by the Department of Industrial
Relations and the Department of Insurance. In 2005, SB899 was signed into law. This landmark reform legislation that overhauled the workers' compensation system and required independent medical reviews, established employer-selected doctor networks and imposed uniform standards. As a result, insurance capital has flowed into the state and new insurers have entered the market. According to the Department of Insurance, base rates have fallen over 35% since January 2004.
Overview of California Tax System
Overview of Payroll Tax System:
||Base or Measure
|Corporate Income or Bank and Corpoation Franchise Tax
||Combined net income apportioned to california
||Franchise Tax Board
|Sales and Use Taxes
||Receipts from sales or lease of taxable items
||Board of Equalization
||100% of assessed valuation
||Board of Equalization
|Personal Income Tax
||Taxable personal income
||Franchise Tax Board
|Unemployment Insurance Tax (aka Payroll Tax)
||First $7,000 of wages per employee per year
||Employment Development Department
|Disability Insurance (employee paid)
||Taxable wage limit for withholding of $90,669
||Employment Development Department
|Finished Goods, Raw Materials, and Inventory Tax
|Workers' Compensation Insurance
||per $100 of payroll
||Varies based on job classification, workplace, safety record, and insurance carrier.
||Department of Insurance, Department of Industrial Relations
||Employment Training Tax (ETT)
|California Personal Income Tax (PIT)
||Employee (employer withoholds from employees wages)
||Employee (employer withholds from employees wages)
||First $7,000 of subject wages per employee per year
||First $7000 of subject wages per employee, per year
||First $93,316 of subject wages, per employee per year
||New Employer tax rate is 3.4 percent(.034) for up to three years. Following this period
||Set by statute at
(.001) of UI
|The 2011 SDI
tax rate is 1.2
the rate for DI
and PFL) of
year. The SDI
and tax rate are
set by the
|Withheld based on employee's Form W-4 or DE 4
amount has been
calculated at the
highest UI tax
rate of 6.2
percent [$7000 x
year ($7,000 x
year ($93,316 x
California can readily accommodate expansion and location projects with properly-zoned,
infrastructure-rich industrial and commercial sites. Many communities have also adopted state-ofthe-art permit streamlining practices, which enable them to efficiently meet a company's project timeline. A number of counties have established Business Environmental Resource Centers that act as one-stop, non-regulatory offices set up to help businesses understand and comply with air quality, hazardous materials/waste, solid waste and water quality regulations. They act as neutral third-party mediators and their services are free and confidential. These communities will assign a project manager to personally guide an applicant through the permit process.
Overview of Permit Procedure
There are four elements generally required to initiate the permit process. The following is a
summary of the steps that a project may follow to become fully permitted in California.
1. An adequate description of the proposed project.
2. A completed application form of usually less than four pages.
3. The appropriate filing fee as determined by the local, state, or federal permitting authority.
4. California law requires development projects to be reviewed for any potential effects on the
environment. Impacts on air and water quality, traffic, housing, and land use are generally considered. If there is a significant effect on resources, then further documentation may be required.
The permit process starts at the local level in the planning department. Local permits called "land
use" permits are generally required to ensure that a proposed project or business is located in the appropriate region of the city that has been identified for similar use.
These regions, called "zones," are identified in the city or county's general plan, and represent what the local government (on behalf of the citizens of that community) requires of the business to operate in a particular zone. Land use permits ensure that the proposed project use is consistent with the general plan and verify that the proposed project conforms to the overall plan
for the local community.
When a proposed business first initiates the permitting process with the local authorities, it automatically begins an environmental review process. This is in the form of an Initial Study, which checks whether or not the project may have an effect (for example, increased demand) on such factors as water supply (yes, no or maybe). Any "yes" and "maybe" impacts may need to be mitigated, depending on the local environmental and political climate. A
significant number of "yes" answers may inspire the lead agency (which is in charge of coordinating all permits), to require an Environmental Impact Report (EIR).
The Permit Streamlining Act places lead agencies on strict timelines in which to issue all
Incentive and tax information is provided to Area Development by each state's economic development or commerce agency for information purposes only and is subject to revision at any time by the state government. Please contact the state agency directly for full requirements and offerings.