While S-corporations often have federal income tax benefits, California has an additional tax for S-corps. That tax can eat into your federal tax savings or make you want to look for alternatives to a California S-corporation.
What counts as a California S-corporation?
California recognizes your S-corp election with the federal Internal Revenue Service.
If you’ve formed a C-corp in California and made a federal S-corp election, California will recognize you as an S-corp.
If you have a California Limited Liability Company, California will treat you like a corporation for tax purposes if you’ve elected to have the IRS tax you as a C-corporation or S-corp.
Out-of-state businesses subject to California taxes also pay taxes according to their federal income tax election.
Can an LLC be an S-corp only for federal income taxes not California income taxes?
No, if you’ve chosen to receive S-corp benefits for federal taxes, you can’t choose to not be an S-corp for state income tax.
While it may seem unfair that California is taking some of your federal tax savings for itself without giving you additional benefit, that’s how California taxes work.
Tax Benefits of Being an S-corporation
The primary benefits of being an S-corp in California will come from reducing your federal taxes.
Federal Income Tax Benefits of S-Corporation Status
When you have an S-corp, you have to pay federal income tax on your profits. That’s the same as any other business entity unless you have a C-corp subject to double taxation.