How Businesses Report Income in California
The following forms of businesses report income in California: incorporated businesses (banks, financial and general corporations, and S corporations), sole proprietorships, Limited Liability Companies (LLC's), partnerships, Limited Partnerships (LP's) and Limited Liability Partnerships (LLP's), estates and trusts, and exempt organizations. For 1999, 324,407 California banks, financial and general corporations filed returns, reporting $525 billion in profit and $208 billion in loss. The total number of S corporations returns filed was 156,629, reporting $41.9 billion in profit and $5.3 billion in loss. There were 2,234,127 returns filed as sole proprietorships, reporting $43.1 billion in profit and $4.2 billion in loss. 61,881 LLCs filed returns, reporting $29.3 billion in profit and $11.8 billion in loss. Partnerships, LPs, and LLPs filed 201,427 returns, reporting $52.8 billion in profit and $21.9 billion in loss. There were 249,149 returns filed by estates and trusts, and 76,814 returns filed by exempt organizations.
Incorporated
Businesses
Incorporated businesses include banks, financials, general
corporations and S corporations. Most California banks and corporations file Form
100, Corporation Franchise or Income Tax Return. S corporations must file Form
100S, California S Corporation Franchise or Income Tax Return.
Data
Sources
Data appearing in the text portion of this report and the
Bank and Corporation Appendix are based on a stratified random sample of corporate
tax returns. The sample includes all bank and corporation returns with state net
income or loss greater than $5 million, all returns reporting total receipts or
assets of $50 million or more, and a stratified random selection of approximately
2 percent of all other corporations with state net income or loss of less than
$5 million.
The 1999 sample included 5,954 large banks and corporations and 10,036 other banks and corporations. Included among these were 4,822 S corporations. The tables in the statistical appendix provide summary statistics for all incorporated businesses.
Accounting
Periods
Banks, financials, general corporations, and S corporations
file returns on either a calendar or fiscal-year basis. All returns and tax are
due no later than two-and-a half months after the accounting period ends. FTB
automatically grants filing date extensions for seven months. However, tax due
must be paid by the original due date.
Income
and Deductions
Most corporations doing business in California report
income and deductions on a domestic basis. If they operate internationally and
have not elected to file on a water's-edge basis, they file on a worldwide basis.
Reported income is then apportioned to California or elsewhere. California corporations
may report federal income and deductions on their California return. However,
certain adjustments must be made to reflect differences between federal and California
tax laws. Typical California adjustments include the disallowance of the federal
deduction for taxes on or measured by income, the inclusion of interest received
on government obligations (except for corporations subject to only the income
tax), the exclusion of inter-company dividends to the extent they were paid from
unitary companies that were included in a combined report, and the exclusion of
dividends paid out of income previously subject to California corporate franchise
or income tax.
Unitary Method
The phrase "income attributable to California" refers to situations
in which a corporation does business both within and outside of California and
its operations outside of California are "unitary" with the business
activity within California. This connection can take several forms that convey
a high degree of interdependence between operations, such as centralized decision
making, purchasing, selling, accounting, and financing. In such cases, California's
share of total income is determined by application of a formula that is based
on three factors: property, payroll, and sales.
Beginning in 1993, legislation was enacted that required the use of a "double weighted" sales factor. Currently, corporations in the banking, savings and loan, agricultural, or extractive industries are exempt from the sales double-weighting requirement. Generally, once the apportionment factors have been determined, the average is applied in determining the income attributable to California.
Apportionment
of Income
Corporations that are doing business both within and outside
of California are required to file Schedule R, Apportionment and Allocation of
Income. Non-business income (attributable to transactions not considered to be
an integral part of the regular business operation) from intangible property is
generally allocated entirely to the state of commercial domicile. Non-business
income from tangible property is allocated to the state where the property is
physically located. The sum of the applicable non-business income items and business
income attributable to California by the apportionment formula constitutes the
amount of a corporation's entire net income subject to tax. The apportionment
formula (property, payroll, and double or single weighted sales) is applied to
the total business income to determine the portion taxable in California. For
each factor, the ratio of the amount within California to the total amount within
and outside of California is calculated. The average of the factors constitutes
the apportionment percentage.
For 1999, the franchise tax rate and the income tax rate for general corporations other than S corporations was 8.84 percent. For S corporations, the tax rate was 1.5 percent. Banks and financial corporations were required to pay an additional in-lieu tax of 2.0 percent. This in-lieu tax is imposed to adjust for exemptions from certain local levies that are allowed to banks and financial corporations. Thus, the composite tax rate was 3.5 percent for financial S corporations and 10.84 percent for banks and other financial corporations not electing S corporation status.
All corporations (including S corporations, financial corporations and real estate mortgage investment conduits (REMICs)) that were subject to the franchise tax were required to pay at least the minimum franchise tax of $800. An exception to this rule applied to qualified new corporations. For income years beginning on or after January 1, 1999, and before January 1, 2000, the minimum tax for qualified new corporations with less than $1 million in gross receipts and an estimated first year tax liability of $800 or less was $500. If during the income year, the corporation's gross receipts exceeded $1 million or the lax liability exceeded the minimum franchise tax of $800, the corporation must pay an additional amount of $300.
Other pre-existing exceptions were qualified inactive gold and quicksilver mining corporations that were required to pay a minimum of $25 and credit unions with less than $25,000 in gross receipts that were not required to pay the minimum tax.
Other corporations deriving income from California sources, but not sufficiently present to be classified as doing business in California, must pay income tax on California source income using the same rate as the franchise tax rate.
Estimated
Tax
Corporations are required to pay their tax on a current basis
through estimated tax payments for the privilege of exercising their franchise
to do business in California. Corporations pay the estimated tax in quarterly
installments during the income year. For corporations subject to the franchise
tax, the first quarterly installment must be at least the minimum franchise tax
of $800, with the exception of qualified new corporations mentioned earlier.
Banks, Financial and General Corporation
Returns
Files
The total number of bank and corporation returns filed was 324,407,
a 5.9 percent increase over the previous year. Of those returns filed for 1999,
1.5 percent had state net income that exceeded $1 million. These corporations
accounted for 82.6 percent of the total taxes paid by all corporations. Corporations
with less than $25,000 in state net income comprised 77.5 percent of all returns
filed, yet accounted for only 5.1 percent of taxes paid. Corporations with negative
income accounted for 35.0 percent of the total returns filed, reporting $42.0
billion in losses, an increase of 33.2 percent from 1998.
Accounting
Periods
For the 1999 income year, 46.2 percent of corporations reporting
state net income filed returns with an accounting period ending December 31 and
10.9 percent filed with an accounting period ending June 30.
Income
and Deductions
Corporations reported over $4.8 trillion in total income
for 1999. This amount was a combination of gross receipts ($26.1 trillion) less
the cost of goods sold ($23.2 trillion) plus other income. Other income, which
totaled nearly $1.9 trillion, includes dividends, interest, rents, royalties,
capital gains, and other miscellaneous items.
Total deductible expenses were over $4.3 trillion for 1999. The largest single expense was for the category of "other deductions" at $1.4 trillion, followed by "salaries and wages" at $1.0 trillion and "interest" at $752.8 billion. The "other deductions" category includes unallocated expenses, deductions for administrative expenses, sales discounts, travel and entertainment expenses, and losses resulting from theft, fire, storm, etc.
Apportionment
of Income
For 1999, the number of corporations with apportioned multi-state
or multi-national activity was 34,554, compared to 35,511 in 1998, a 2.7 percent
decrease. The state net income after apportionment was $24.6 billion, compared
to $32.0 billion in 1998, a 23.1 percent decrease.
California property valuation totaled $867 billion for all apportioning corporations (excluding banks and other financial corporations), which represented 10.3 percent of the total property value for apportioning corporations. California wages and salaries amounted to $206 billion, or 13.6 percent of total payroll. California sales amounted to $1.1 trillion or 9.2 percent of total sales. The net effect of these factors was an average apportionment of 10.6 percent of unitary income to California. This compared to 7.3 percent in 1998.
Credits
The total amount of tax credits used by California corporations (including S corporations)
for 1999 was $889 million, a 5.7 percent decrease from $943 million in 1998. Most
credits are limited during the computation of alternative minimum tax (AMT). The
section below provides information about credit limitations created by AMT.
Appendix C, Table 5 presents an enumeration of various tax credits applied for 1999, compiled for Banks, Financial, General and S corporations.
Note that information presented in Table 5 was developed from the Business Entities Tax System and may differ from information presented elsewhere in the report that was developed from sample data. Of interest is the growing impact of tax credits on corporate tax liabilities and, in particular, the impact of the Research Credit at $346 million and the Manufacturers' Investment Credit (MIC) at $331 million.
Alternative
Minimum Tax
Each bank or corporation whose taxable income plus adjustments
and tax preference items total more than $40,000 may owe AMT. To determine if
AMT is due, corporations must calculate their alternative minimum taxable income
(AMTI) by re-computing certain deductions and income items and by increasing regular
taxable income by specified tax preference items. The tentative minimum tax (TMT)
rate of 6.65 percent (banks and financial corporations must add
the in-lieu tax of 2.0 percent to this amount) is applied to AMTI to determine
TMT. If TMT is more than the regular tax, the corporation must pay AMT.
Total
Tax Liability
Most of California's tax credits are limited by TMT.
This credit limitation applies to corporations even if they do not owe AMT. Certain
credits may reduce the regular tax below TMT. Also, a few credits may reduce AMT.
In 1999, 3,240 corporations paid $106.8 million in AMT.
For income years ending in 1999, the amount of total tax from bank and corporation taxpayers was almost $4.9 billion, which was an increase of 5.1 percent over 1998. Of the $4.9 billion in total tax, the manufacturing sector accounted for nearly $1.3 billion in tax for income years ending in 1999. This, the largest portion of taxes paid by a major sector, represented 25.9 percent of total corporate tax liability but represented only 34,149 tax returns, or 10.5 percent of the total number of corporate tax returns filed. The finance, insurance and real estate industry accounted for nearly $1.2 billion in tax, which represented 24.0 percent of total corporate tax liability, and 62,073 tax returns, which represented 19.1 percent of corporate returns filed. The next highest amounts of tax were generated by the trade industry and the transportation, communication and utilities sector. The trade industry accounted for $0.9 billion in tax, which represented 18.3 percent of total tax liability, and 66,345 tax returns, or 20.5 percent of returns filed. The transportation, communication and utilities sector accounted for $0.7 billion in tax, or 13.9 percent of total tax, and 11,799 returns, or 3.6 percent of corporate tax returns filed.
Estimated
Tax
Corporations paid $4.5 billion in 1999 estimated tax payments,
compared to $4.8 billion in 1998, a 5.7 percent decrease.
Overpayments
and Final Payments
78,125 corporations had overpayments totaling over
$2.4 billion, a 4.5 percent increase in the amount of overpayments from the prior
year. These overpayments were either applied to the estimated tax for the following
year, applied to another income year's liability, or refunded.
In addition, 122,024 corporations made final payments of over $1.1 billion, an increase in final payments of 2.9 percent over the previous year.
S Corporations
Certain
corporations, defined in part as those with no more than 75 shareholders, may
elect federal S corporation status. The benefits of such an election are the limited
liability of a corporation and tax advantages similar to those enjoyed by a partnership.
Income is also "passed through" to the individual shareholders and is
taxable to them.
California corporations that elect federal S corporation status are deemed to have made a California S election on the same date as the federal S election, unless they elect C corporation (regular taxable corporation) status for California. The federal S election, as well as any California elections to be treated as a C corporation or to return to S corporation status, must be reported to the Franchise Tax Board using form FTB 3560, S Corporation Election or Termination/Revocation.
If the S corporation has any nonresident shareholders or fiduciaries, it must include with the return the consents of the nonresidents to be subject to the jurisdiction of the State of California to tax its pro rata share of S corporation income attributable to California sources. Failure to attach such consents may cause FTB to revoke the S corporation status.
Returns
Filed
For the 1999 income year, 156,629 corporations filed as S corporations,
an increase of 1.6 percent over 1998. Of those returns filed for 1999, 62.6 percent
had state net income. S corporations with negative income accounted for 37.4 percent
of the total returns filed, reporting $4.4 billion in losses.
Accounting
Periods
For the 1999 income year, 95.4 percent of S corporations reporting
state net income filed returns with an accounting period ending December 31.
Income
and Deductions
S corporations reported nearly $192 billion in total
income for 1999. This amount was a combination of gross receipts ($461 billion)
less the cost of goods sold ($297 billion) plus other income, which totaled over
$27 billion. Total deductible expenses were nearly $155 billion for 1999. The
largest single expense was for the category of "other deductions" at
$57 billion, followed by "salaries and wages" at $45 billion and "compensation
of officers" at $15 billion.
Apportionment
of Income
For 1999, the number of S corporations with apportioned
multi-state or multi-national activity was 11,408, compared to 11,319 in 1998,
a 0.8 percent increase. The state net income after apportionment was $5.2 billion,
compared to $4.9 billion in 1998, a 6.1 percent increase. California property
valuation totaled $34 billion for all apportioning S corporations (excluding banks
and other financial corporations), which represented 32.8 percent of the total
property value for apportioning S corporations. California wages and salaries
amounted to $16 billion, or 33.1 percent of total payroll. California sales amounted
to $77 billion or 30.7 percent of total sales. The net effect of these factors
for S corporations was an average apportionment of 31.9 percent of the unitary
income to California. This compared to 23.7 percent in 1998.
Total
Tax Liability
For income years ending in 1999, the amount of total
tax from S corporation taxpayers was over $454 million, which was an increase
of 11.5 percent over 1998. Of the $454 million in total tax, the services sector
accounted for nearly $134million in tax for income years ending in 1999. This,
the largest portion of taxes paid by a single sector, represented 29.4 percent
of total S corporation tax liability, and represented 67,752 tax returns, or 43.2
percent of the total number of S corporation tax returns filed. The trade industry
accounted for nearly $100 million in tax, which represented 21.9 percent of total
S corporation tax liability, and 34,862 tax returns, which represented 22.3 percent
of S corporation returns filed. The next highest amounts of tax were generated
by the finance, insurance and real estate industry, and the manufacturing sector.
The finance, insurance and real estate industry accounted for more than $77 million
in tax, or 17.1 percent of total tax liability, and 19,923 tax returns, or 12.7
percent of S corporation returns filed. The manufacturing sector accounted for
over $73 million in tax, which represented 16.2 percent of total tax, and 13,770
returns, or 8.8 percent of the S corporation tax returns filed.
Estimated
Tax
S corporations paid $329 million in 1999 estimated tax payments,
compared to $288 million in 1998, a 14.2 percent increase.
Overpayments
and Final Payments
37,895 S corporations had overpayments totaling
over $113 million, a 24.8 percent increase in the amount of overpayments from
the prior year. These overpayments were either applied to the estimated tax for
the following year, applied to another income year's liability, or refunded.
In addition, 53,557 S corporations made final payments of over $175 million, an increase in final payments of 15.1 percent over the previous year.
Sole
Proprietorships
A sole proprietorship is a form of business in which
one person directly owns the assets of the business and is directly responsible
for its debts, in contrast to a partnership or a corporation. Because a sole proprietorship
is not a separate legal entity, like a partnership or a corporation, it is not
itself a taxable entity. The sole proprietor must report income and expenses from
the business on the federal Schedule C Profit or Loss from Business, Form 1040
and on the Business Income or (Loss) line on the Schedule CA, Form 540 for California.
Data
Sources
The source of sole proprietorships data is a stratified random
sample of personal income tax returns filed during the 2000 filing season. Additional
information on this sample is presented in the Personal Income Tax section of
this report.
Returns
Filed
For the 1999 income year, 2,234,127 returns included a sole
proprietorship, an increase of 1.0 percent over 1998. Of those returns filed for
1999, 75.0 percent of total returns reported $43.1 billion in profit. Sole proprietorships
with negative income accounted for 25.0 percent of the total returns filed, reporting
$4.2 billion in losses.
Total
Tax Liability
Individuals who owned sole proprietorships paid $7.7
billion in total tax for the 1999 income year, an increase of nearly 20 percent
over 1998.
Tax Rates
Sole
proprietorships are taxed at the same rates as individuals. See Tables 1A-1C in
Appendix A for a description of the rates.
Limited
Liability Companies (LLCs)
An LLC is a hybrid between a partnership
and a Corporation that combines the "pass-through" treatment of a partnership
with the limited liability accorded to corporate shareholders. If an LLC elects
to be taxed as a corporation for tax purposes, it must file Form 100 and is subject
to the applicable provisions of the Bank and Corporation Tax Law. If an LLC is
treated as a partnership for tax purposes, it must file Form 568. Additionally,
every LLC that is classified as a partnership or that is treated as a sole proprietorship
for California tax purposes is subject to the annual LLC tax as well as a fee
based on total income. The annual fee for the1999 taxable year was as follows:
$865 if the total income of the LLC from all sources reportable to California
for the taxable year was $250,000 or more, but less than $500,000; $2,595 if the
total income was $500,000 or more, but less than $1.0 million; $5,190 if the total
income was $1.0 million or more, but less than $5.0 million; or $7,785 if the
total income was $5 million or more. To determine the LLC fee, "total income"
means gross income plus the cost of goods sold that are paid or incurred in connection
with the trade or business of the taxpayer.
Data
Sources
The LLC data presented in this section are derived From FTB's
Business Entities Tax System, which includes information from all Bank and Corporation,
Partnership, and LLC tax returns.
Returns
Filed
For the 1999 income year, 61,881 LLC returns were filed. This
represented a 41% increase over 1998. 59% reported profit, totaling nearly $30
billion; 41% reported losses totaling almost $12 billion.
Tax
Received
LLCs paid almost $50 million in taxes for the 1999 income
year. They also paid $86 million in fees.
Tax
Rates
An LLC that is classified as a corporation for California tax
purposes is subject to the same tax return and tax payment requirements as any
other corporation. LLCs that are classified as partnerships or that are treated
as sole proprietorships are subject to the annual LLC tax of $800 as well as a
fee based on total income.
Partnerships,
LPs and LLPs
Every partnership that engages in a trade or business
or has income from a California source must file a California return. Regardless
of where the trade or business of the partnership is conducted, a partnership
is considered to be doing business in California if any of its partners (general
or limited) or other agents are conducting business in California on behalf of
the partnership. All partnerships file Form 565. An electing large partnership
that completes federal Form 1065-B, U.S. Return of Income for Electing Large Partnerships,
must still use Form 565. California does not conform to the electing large partnership
provisions of federal law. Both foreign and domestic Limited Partnerships (LPs)
and Limited Liability Partnerships (LLPs) doing business in California or having
a certificate on file or registered with the California Secretary of State (SOS),
whether or not doingbusiness in California, must file a return and pay the annual
tax of $800.
Data Sources
Data appearing in this report are derived from FTB's Business Entities Tax System.
This file includes data from all 1999 partnership returns.
Returns
Filed
For the 1999 income year, 201,427 returns filed as partnerships,
a decrease of 3.9 percent over 1998. Of those returns filed for 1999, 30 percent
of total returns reported almost $53 billion in profit. Partnerships with negative
income accounted for 70 percent of the total returns filed, with nearly $22 billion
in losses.
Minimum Tax
Partnership income is not taxed. LPs and LLPs pay an $800 minimum tax and
their income, credits, and deductions flow through to the partners who are liable
for any tax. Partners may be individuals, corporations, other partnerships, tax-exempt
organizations, nominees, or other legal entities.
Estates
and Trusts
The personal income tax law applies to the income of estates
and to property held in trust, whether the income is accumulated or distributed.
In the case of estates, if the decedent was a resident of California at the time of death, all of the estate's net income is taxable, regardless of source. If the decedent was a nonresident, only income of the estate from California sources is taxable, unless income is distributed to California beneficiaries.
In the case of a trust, taxability depends on the residence of the fiduciaries and beneficiaries. If either the fiduciary or the beneficiary is a California resident, all of the income, regardless of source, is taxable. However, all of the income derived from sources within California and not distributable is taxable to the trust irrespective of the residence of the trustees or the beneficiaries. If either the trustee or the non-contingent beneficiary is resident, the trust is taxable on all income from all sources that is not currently distributable. Form 541 is used to report the tax information of estates and trusts.
Data
Sources
Data appearing in this report are based on a stratified random
sample of fiduciary returns. The sample includes all estate and trust returns
with adjusted total income greater than or equal to $1,000,000 or income distribution
deduction greater than or equal to $500,000. For other estate and trust returns,
the sample is stratified according to the amount of adjusted total income and
income distribution deduction as reported on Form 541.
Returns
Filed
In 1999, nearly 250,000 Estates and Trusts filed returns in
California. Simple Trusts accounted for 70% of those returns, followed by Complex
Trusts at 13%, and Decedent Estates and Grantor Type Trusts at 8% each. Simple
trusts reported the majority of total income, deductions, and tax liability reported
by all estates and trusts, accounting for 73% of gross income, 69% of total deductions
and 79% of the total tax liability.
Total
Tax Liability
Estates and Trusts paid $379 million in tax in 1999.
Income
and Deductions
Estates and Trusts reported over $12.0 billion in total
income for 1999. The largest single source of income was capital gains at nearly
$5.4 billion, followed by rents, royalties, and partnerships at $2.0 billion,
and dividends at over $1.8 billion. Total deductions were over $2.7 billion for
1999, led by "miscellaneous deductions" at nearly $1.7 billion, followed by fiduciary
fees at $285 million, charitable contributions at $268 million, and professional
fees at $259 million.
Tax Rates
The tax rates for estates and trusts are the same as for single individuals.
Exempt
Organizations
Certain organizations, both incorporated and unincorporated,
are exempt from corporate tax. These exempt organizations are organized and operated
for nonprofit purposes and have been granted exempt status under the law. They
include churches, charitable and educational organizations, civic leagues, social
clubs, fraternal societies, state-chartered credit unions, homeowner associations
and others. Churches or religious orders and organizations with gross receipts
normally less than $25,000 are not required to file returns. However, other private
foundations are required to file returns even if gross receipts are less than
$25,000. Those organizations required to file must file one or more of the following:
Form 199, Exempt Organization Annual Information Statement or Return; Form 100,
California Franchise or Income Tax Return; or Form 109, Exempt Organization Business
Income Tax Return. For 1999, based on the Business Entities Tax System, there
were a total of 147,118 active exempt organizations, of which 76,814 filed returns.
Tax
Rate
Unrelated business income of exempt organizations is subject
to California corporation income tax, rather than franchise tax. The tax rate
on such income is the same as for non-exempt organizations.
