California Basic Business Taxes 2011
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 (March 2011)
Corporation Franchise or Income Tax
The Franchise Tax Board administers franchise or income taxes for business entities. The tax rate for C-corporations is 8.84 percent (10.84 percent for banks and financials) on corporate net income. However, there is currently a minimum tax of $800 for corporations, even if operating at a loss. California`s S-Corporations are subject to a tax rate of 1.5 percent (3.5 percent for a bank and financial) 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 tax. Effective January 1, 2011, California Businesses will have to option to elect 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.
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 percent 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. Go to the FTB website for further information or FTB form and Instructions 100W.
Payroll Property Sales Tax:
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 percent 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 will 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. www.ftb.ca.gov/aboutFTB/manuals/audit/water/
Sales and Use Tax:
Administered by the Board of Equalization, the State of California imposes a sales and use tax that is 8.25 percent. In addition, local counties and cities can add a percentage to the State tax that is currently averaging one percent. The sales tax applies to the gross receipts of retailers from the sale of tangible personal property that 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. Construction labor is not taxed. www.boe.ca.gov/ www.boe.ca.gov/cgi-bin/rates.cgi
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 percent of assessed valuation. The tax rate is one percent 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 percent, 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 two percent 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. www.boe.ca.gov/proptaxes/proptax.htm
California State Contact:
California Business Investment Services
801 K Street, 21st Floor
Sacramento, CA 95814
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.