Curious about those radio ads urging Californians to incorporate in Nevada to avoid paying California taxes? Here are some tips to help you recognize questionable tax avoidance strategies.
California residents are taxed on all income, including income from sources outside California. If California residents incorporate outside of California, yet remain California residents, any dividends or salary they receive from the corporation will be taxable to California, regardless of where the corporation is incorporated or does business.
In addition, non-California residents who receive income from a California source, such as salary for work performed in California for a corporation, regardless of where that corporation is incorporated or does business, may be required to pay California tax.
Any corporation, regardless of where it is incorporated, that is doing business in California, is subject to California franchise tax. Doing business is defined as actively engaging in any transaction for profit. A single transaction can be sufficient to be doing business. In the case of limited partnerships, limited liability partnerships, and limited liability companies, California assesses an $800 annual tax for doing business in this state. Limited liability companies are also assessed an additional fee, which is based on worldwide gross receipts.
For more information on corporation filing requirements, see the following publications:
- FTB Publication 1060, Guide for Corporations Starting Business in California.
- FTB Publication 1063, California Corporation Tax Law - A Guide for Corporations.
- FTB Publication 1050, Application and Interpretation of Public Law 86-272.
If you failed to meet your filing obligations in the past, now is the best time to come into compliance by participating in either California's Income Tax Amnesty Program or our ongoing Voluntary Disclosure Program.