Key Takeaways

  • California imposes corporate income tax (8.84%), franchise tax ($800 minimum), and alternative minimum tax (6.65%).
  • S Corporations and LLCs also face state-level franchise tax, even if reporting federal losses.
  • Businesses must file California Form 100 annually, regardless of profitability.
  • Tax returns in California are privileged documents and protected under state law, limiting disclosure in litigation.
  • Market-based sourcing rules now apply, meaning revenue is taxed based on customer location rather than business location.
  • Corporate compliance includes adhering to both tax obligations and corporate governance rules under the California Corporations Code.
  • Nonresident or out-of-state companies may still owe California corporate tax if they derive income from California sources.

The California corporate tax return instructions are vital for any small business owner in the state because of the fact that business taxes in California are harsher than in most other states. Although California is an excellent place to live due to its warm climate, natural landscapes, and thriving metropolitan areas, both personal and business income taxes are considerably higher than the national average.

Not only that, but California is one of a small number of states that impose personal and business taxes on S Corporations or limited liability companies. On a federal level, it is considered double taxation to tax both the business owner and the business itself, but that doesn't apply here, as they are both taxed. Add the double taxation to the already high costs and standard of living, and you get a situation where it's very hard to get a business up and running.

Types of Business Taxes in California

There are three different types of taxes for businesses in California. Almost all businesses in the state pay one or more of these taxes.

  • Corporate tax: This applies to corporations as well as limited liability companies that want corporation status. The tax rate is calculated based on all taxable income collected within the state, and its percentage is 8.84%, which is higher than the national average.
  • Franchise tax: This must be paid by S Corporations, limited partnerships, and limited liability companies as well as limited liability partnerships. It also applies to regular corporations that do not register a positive net income, therefore paying the franchise tax instead of the corporate tax.
  • Alternative minimum tax: The alternative minimum tax was created as a way to prevent companies from writing down income to prevent paying taxes. Its rate is 6.65% and applies to corporations and limited liability companies that want corporation status.

Additional Legal Considerations for California Corporate Tax

California tax law treats corporate tax returns differently than many other states. Tax returns are considered privileged documents, which means they generally cannot be disclosed in litigation or discovery without specific exceptions. This privilege reinforces the importance of accurate and timely filings since courts and agencies recognize the sensitivity of tax information.

Furthermore, corporate governance laws interact with tax compliance. Under the California Corporations Code, companies must maintain accurate accounting records and comply with reporting rules to preserve their good standing. Failing to meet these requirements may result not only in tax penalties but also in broader corporate liability.

Tax Return Instructions Based on Company Type

Traditional corporations pay the 8.84% corporate tax or the 6.65% alternative minimum tax depending on the declared income number. Any personal income that the company's shareholders make is also subject to taxation, with the 33% tax rate on dividends being one of the highest in the country.

S Corporations pay a franchise tax of 1.5% of the net income. There is, however, a minimum tax of $800, even when the company reported a negative net income. Then the income is taxed again by the business owners that must pay personal taxes for what they get out of the company.

Limited liability companies pay a franchise tax that's calculated according to the company's gross income. It can go from the $800 minimum to $11,790 for companies registering a gross income higher than $5 million.

Partnerships of any kind must pay the $800 minimum franchise tax as well as any personal income taxes.

Market-Based Sourcing and Out-of-State Companies

In 2025, California’s Franchise Tax Board (FTB) finalized regulations adopting market-based sourcing for corporate income allocation. This approach taxes businesses based on where their customers are located, not where the company operates.

  • Service providers: Revenue is sourced to California if the benefit of the service is received in the state.
  • Licensing and intangibles: Royalties are taxed based on the use of the property in California.
  • Sales of goods: Physical presence rules remain important, but customer location plays a larger role.

For corporations doing business both inside and outside California, this can significantly affect apportionment calculations and increase tax liability. Nonresident companies earning revenue from California customers may still be required to pay California corporate tax, even without a physical presence in the state.

Filing Your Tax Return in California

All corporations within the state of California must file their income tax that they owe the state through Form 100. The California Franchise Tax Board provides the document. Here are the steps for completing it:

  • Fill in the start and end dates of your financial year.
  • Write down the company's name, address, and identifying numbers.
  • Answer the Schedule Q questions on the first two pages.
  • Calculate your net income and write it down on the first page.
  • Compute your gains and losses so you can calculate the amount due in taxes.
  • Fill in the rest of the document and have an officer sign on the second page and write on the current date.

Even if your company is losing money, you are still required to file a tax return. At the very least, you will be paying the $800 minimum tax. California law requires all businesses to update their records by filing a statement with the local Secretary of State, either once a year or every two years.

Under California law, you can be taxed on income from any business endeavor within the state boundaries, even if you or your company are not based in California. If you do business both in California and in other states, you will need to calculate your income based on where it was created and pay your taxes accordingly.

Compliance Deadlines and Penalties

California imposes strict deadlines for filing and payment:

  • Filing deadline: Generally the 15th day of the 4th month after the close of the corporation’s taxable year (April 15 for calendar-year filers).
  • Late filing penalties: A corporation may be charged 5% of the unpaid tax per month, up to 25% of the balance.
  • Failure to pay: Interest accrues on unpaid amounts until satisfied.
  • Minimum franchise tax: The $800 minimum applies even if the corporation is inactive or reports no income.

Corporations must also stay compliant with biennial or annual Statement of Information filings with the California Secretary of State. Noncompliance may lead to suspension of corporate powers, preventing the business from legally operating until reinstated.

Frequently Asked Questions

  1. Do out-of-state corporations have to pay California corporate tax?
    Yes. If your business earns revenue from California customers, you may owe tax under the state’s market-based sourcing rules.
  2. What is the minimum franchise tax in California?
    All corporations, S Corporations, and LLCs owe at least $800 annually, even if they report a loss.
  3. Are California tax returns privileged?
    Yes. Under California law, tax returns are privileged and generally cannot be disclosed in litigation.
  4. When are California corporate tax returns due?
    Most corporations must file by the 15th day of the 4th month after their taxable year ends (April 15 for calendar-year filers).
  5. What penalties apply for late filing?
    The state may assess a penalty of 5% per month of unpaid tax, up to 25%, plus interest on unpaid balances.

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