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Minimum Franchise Tax in the First Tax Year

There is a misunderstanding that all corporations doing business in California are not subject to the minimum franchise tax in their first tax year. Newly incorporated or qualified corporations are not subject to the minimum franchise tax in their first year. They compute the tax for their corporation’s first tax year by multiplying their California net income by the appropriate tax rate. Even if that amount is less than the minimum franchise tax, the corporation pays only that lesser amount. After the first year, their franchise tax is the larger of their California net income multiplied by the appropriate tax rate or the minimum franchise tax of $800.

There are situations where corporations that incorporate, qualify, or start doing business in California are subject to the minimum franchise tax in their first tax year. For example, a corporation which has not qualified to do business in California is subject to the minimum franchise tax if it is doing business in California. Also, a limited liability company (LLC) whose first tax year in California is taxed as a partnership or a disregarded entity and in a later year checks the box to be taxed as a corporation; it will be subject to the minimum franchise tax for its first tax year as a corporation.

Under California law a business entity can convert its legal form to or from a corporation by filing the necessary paperwork with the Secretary of State (SOS). An LLC a limited liability company that converts to a corporation with SOS is not subject to the minimum franchise tax for its first tax year as a corporation, whether or not the LLC did business in California in a prior year.

All corporations are subject to the franchise tax if they are incorporated or organized in California, qualified or registered to do business in California, or start doing business in California, whether or not incorporated, organized, qualified or registered under California Law. A corporation is subject to the franchise tax until the corporation dissolves or withdraws with the Secretary of State or until it stops doing business in California.

Back to October 2012 Tax News