Are you struggling to stay afloat in your California-based business? Whether the financial constraints result from the economic downturn, other cash flow issues or damages sustained during the coronavirus pandemic, you’ll need to cut costs to stay in business.
Some business owners in this situation choose to hold off on paying taxes until they’re in a better financial position. But this approach can be costly and lead to unintended consequences. This guide discusses what you can expect if you don’t pay the California Franchise Tax.
What is California Franchise Tax?
California is one of the few states in the nation that charge a franchise tax. As a result, you’ll pay a fee to do business in the state.
Understanding California Franchise Taxes
The amount of franchise taxes your company will pay depends on its legal structure.
Limited Liability Companies (LLCs) and Limited Partnerships (LPs)
Limited liability companies (LLCs) are assessed franchise tax based on their gross earnings. However, the tax liability is the same for Limited Partnerships (LP) regardless of how much they earn. Here’s what you’ll pay if you’re operating as an LLC or LP in California.
- LLC Franchise tax: $800 (for gross income below $250,000)
- LLC Franchise tax: $900 (for gross income between $250,000 and $499,999)
- LLC Franchise tax: $2,500 (for gross income between $500,000 to $999,999)
- LLC Franchise tax: $6,000 (for gross income between $1 million to $4,999,999)
- LLC Franchise tax: $11,790 (for a gross income of $5 million or higher)
- LP Franchise tax: $800 (regardless of income level)
S-Corporations and C-Corporations
Here’s what to expect if you’re an S-corporation or C-corporation that operates in the state of California:
- S-Corporations: 1.5 percent of net income (minimum of $800)
- C-Corporations: $800 (if the company had no earnings)
Other Considerations
General Partnerships (GPs) and sole proprietorships are not subject to California franchise tax.
When is California Franchise Tax Due?
California Franchise Tax is due on April 15th of each year. This date coincides with the federal income tax guideline, and you can file an extension in advance if you need more time to pay.
If the state of California approves your request, you’ll get an additional six months to come up with the funds – making the franchise tax liability payable by October 17th.
What Happens If You Don’t Pay California Franchise Tax?
The California Franchise Tax Board (FTB) takes enforcement action in any of these situations.
Non-payment Penalty
If you’re considering ignoring the franchise tax liability owed by your small business, please don’t. Instead, you’re better off hiring a professional or tax relief firm to help you resolve the outstanding balance.
But if you don’t heed this advice, the financial consequences could be dire. For starters, the State of California Franchise Tax Board will charge a penalty of up to 25 percent of what’s owed. And assuming you continue to ignore their notices and other collection efforts, the tax authority may file a lien against your small business and pass the recovery costs on to you.
Late Filing Penalty
Failure to file a timely return results in a 25 percent penalty based on the amount you owe minus any payments or credits that were on your account prior to the return’s due date. The minimum late filing penalty is the lower of $135 or 100 percent of your outstanding tax liability, and the penalty is automatically added to your account immediately following your return’s due date.
Late Payment Penalty
You’ll be assessed a late payment penalty if you remit payment for unpaid taxes after the tax return due date. The late payment penalty equals 5 percent of the amount you owe. In addition, the FTB will add a 0.5 percent penalty each month if the balance remains outstanding. However, the maximum amount you’ll pay for this penalty is 25 percent of the amount you owe.
Estimated Tax Penalty
If you failed to make timely estimated tax installment payments, paid them late or paid far less than you should have, you’d also be on the hook for penalties and interest. The earlier of these time periods are used to calculate the penalty:
- The window between the due date of the installment payment and the date the payment is received
- The window between the due date of the installment payment and your tax return due date
Mandatory e-Pay Penalty
Franchise tax payments must be submitted electronically. Otherwise, you will incur a penalty of 1 percent of the tax liability paid.
Dishonored Payment Penalty
If you make a payment by check, electronic funds or money order and it does not clear the bank, expect a dishonored payment penalty. You’ll pay two percent for payments over $1,250 or the lesser of the payment amount or $25 for payments under $1,250.
Demand to File Penalty
If you haven’t yet filed your income tax return and the FTB sends a notice demanding that you do so, expect an additional penalty on top of the late filing penalty. The demand to file penalty is 25 percent of the tax assessment before credits and payments, even if you’re owed a refund.
Can You Avoid Paying California Franchise Tax?
There is no legal way to avoid paying California Franchise Tax unless you’re in the first year of business and formed your company within the last 14 days of the tax year. So, you would be eligible for an exemption if you created your business on December 24, 2022.
You should also know that 501(c)(3) organizations that operate in California and have received charity exemptions from the state also aren’t required to pay a franchise tax.
What To Do If You Haven’t Paid Your California Franchise Tax
If you haven’t paid your California Franchise Tax due to financial constraints, consider hiring a professional to help you minimize the financial consequences and possibly avoid penalties. They can assist and help you get the financial relief you need and deserve.
