- What is an S Corporation?
- S Corporation Elections
- Filing Requirements and Related Questions
- Doing Business in California and Other States
- Foreign S Corporations - Conventions and Trade Shows
- Limited Liability Companies Treated as S Corporations
- Qualified Subchapter S Subsidiaries
- QSub Annual Tax
- Helpful Forms and Publications
What is an S Corporation?
An S corporation is similar to a partnership, in that the taxable income or loss of the S corporation flows through to the shareholders that report the income or loss on their own returns.
Generally, California law follows federal law in computing the S corporation's income. However, the major difference is that for California purposes, an S corporation's income is taxable at the corporate level and the pass-through of its income to the shareholders is also taxable on their returns.
California law is also different in the following areas:
- The S corporation is allowed tax credits and net operating losses.
- The computation of tax on built-in gains and excess passive income.
For more information on California S corporations, please see Form 100S Booklet (California S Corporation Franchise or Income Tax Return Booklet).
S Corporation Elections
Making the federal S corporation election
Certain requirements must be met before a small business corporation can elect federal S corporation status. A small business corporation elects federal S corporation status by filing federal Form 2553 (Election By a Small Business Corporation) with the Internal Revenue Service.
When a corporation elects federal S corporation status it automatically becomes an S corporation for California. The corporation can elect to remain a California C corporation, by timely filing Form 3560 (S Corporation Election or Termination/Revocation).
Note: To incorporate your business or qualify your foreign corporation to do business in California, contact the Secretary of State, Business Filings at (916) 657-5448, or visit their Website at: www.sos.ca.gov.
Filing Requirements and Related Questions
What is the tax rate for S corporations?
The annual tax for S corporations is the greater of 1.5% of the corporation's net income or $800. Note: As of January 1, 2000, newly incorporated or qualified corporations are exempt from the annual minimum franchise tax for their first year of business. (See below.)
Prepayment upon incorporation
Prior to January 1, 2000, S Corporations that incorporated or qualified to do business made a prepayment of minimum franchise tax to the Secretary of State for the privilege of doing business in California during the corporation's first year.
On or after January 1, 2000, every corporation that incorporates or qualifies to do business in California is exempt from the:
- Prepaid minimum franchise tax paid to the Secretary of State.
- Minimum franchise tax for its first return. (See Example 1 below).
These corporations compute their tax by multiplying their net income for the year by 1.5%. (See Example 2 below)
Example 1 - First year loss:
Beta Corporation incorporates on February 21, 2000, and pays only the Secretary of State filing fee. Beta selects a calendar year end and when it files its first return for the short income year of February 21 to December 31, it shows that the corporation operated at a $3,000 loss. Because Beta is a new corporation, it is not subject to the minimum franchise tax for its first tax return.
Example 2 - Profitable first year:
Johnson Corporation incorporates on January 11, 2000, and pays only the Secretary of State filing fee. Johnson selects a calendar year end and for the year ending December 31, 2000, it shows $20,000 of income. When the corporation files its return, it owes $300 of tax ($20,000 X 1.5%).
Example 3 - Second year return:
Johnson Corporation shows a $1,400 loss on its return for the year ending December 31, 2001. Since the corporation operated at a loss for the year, it owes only the $800 minimum franchise tax.
For California purposes, the S corporation's accounting period must be the same as the one used for federal purposes. The first accounting period cannot end more than 12 months after the date of incorporation or qualification in California.
Short accounting periods (15 days or less)
California does not require new S corporations that have an initial income year of 15 days or less and do not do business during that time to file a return or pay the minimum franchise tax for that period. To qualify for this treatment, S corporations must file Articles of Incorporation with the Secretary of State on or after the following dates:
|Month Incorporated and Taxable Year Ending||Day of the Month|
|January, March, May, July, August October and December
|17th or after|
|April, June, September and November (30-day month)||16th or after|
|February (28-day month)||14th or after|
|February (during Leap Year, 29-day month)||15th or after|
Q. Do I Have to Pay Estimated Tax?
A. All corporations incorporated, qualified, or doing business in California, whether active or inactive, must make estimated tax payments. The Franchise Tax Board will asses an estimated tax penalty if the payment is late or for an insufficient amount.
Q. What Forms Do I Need to File for a Corporation?
A. All California S corporations and LLCs companies treated as S corporations for federal, should file Form 100S (California S Corporation Franchise or Income Tax Return).
Q. When Do I File My Corporation Return?
A. Form 100S is due on the 15th day of the third month after the close of the taxable year. If the due date falls on a Saturday, Sunday, or legal holiday, the filing date becomes the next business day.
Automatic seven-month extension to file: S corporations (in good standing) that have fully paid their tax liability but cannot file their return by the due date receive an automatic seven-month extension to file the return. Since the extension is automatic, there is no extension request form. If the S corporation owes tax, it should submit FTB 3539 (Payment Voucher for Automatic Extension for Corporations and Exempt Organizations) with payment by the original return due date.
Important: An extension to file is not an extension to pay. Tax is due on or before the original return due date regardless of an extension to file.
We treat returns filed after the extended due date as delinquent, with penalties computed from the original return due date.
Doing Business in California and Other States
S corporations that do business in California and other states must apportion their unitary business income using Schedule R, Apportionment and Allocation of Income.
Example: In 2000, David's Toy, Inc., a Nevada S corporation, opens an office in California. Since the S corporation is doing business in both Nevada and California, it must file Form 100S (California S Corporation Franchise or Income Tax Return) and use Schedule R to apportion income between the two states.
Foreign S Corporations - Conventions and Trade Shows
Special rules apply to foreign S corporations that participate in conventions or trade shows in California but normally do not do business in this state.
A foreign S corporation that is not qualified to do business in California is subject to the corporation income tax (1.5 percent of net income; no minimum franchise tax) if it meets all of the following requirements:
- It is not incorporated in California.
- Its sole activity in this state is engaging in convention and trade show activities, as described in IRC Section 513(d)(3)(A), and during the income year,
- It was in the state for seven or fewer calendar days, and
- It did not derive more than $10,000 of gross income reportable to the state from its activities.
For more information regarding conventions and trade shows, please see the instructions for Form 100S (California S Corporation Franchise or Income Tax Return).
Limited Liability Companies Treated as S Corporations
A limited liability company classified as an association and taxable as a corporation for federal purposes may elect S corporation status. The LLC will also be treated as an S corporation for the state and must file Form 100S (California S Corporation Franchise or Income Tax Return). California and federal laws treat these companies as corporations subject to California corporation tax law.
Qualified Subchapter S Subsidiaries
California has conformed to federal law that let an S corporation own a subsidiary. These subsidiaries are commonly called QSubs. The election by the parent S corporation to treat its subsidiary for federal purposes as a QSub is most cases binding for California. A QSub is not treated as a separate entity, but as division of the parent S corporation. All of the QSub's activities are reported on the parent S corporation's return. If a QSub is doing business in California, then the parent S corporation is considered doing business in the state and must file Form 100S (California S Corporation Franchise or Income Tax Return).
QSub Annual Tax
In addition to parent S corporation paying the franchise or income tax, QSub is subject to an $800 annual tax, which is paid by the parent S corporation. The QSub annual tax is due and payable when the S corporation's first estimated tax payment is due. If the QSub is acquired during the year, the QSub annual tax is due when the S corporation's next estimated tax payment is due. The QSub annual tax is subject to the estimated tax rules and penalties.
For more information regarding QSubs, please see Form 100S, General Instructions and FTB Publication 1093 (Frequently Asked Questions: Qualified Subchapter S Subsidiaries (QSub)).
Helpful Forms and Publications
- Publication 1060 (Guide to Corporations Starting Business in California)
- Publication 583 (Starting a Business and Keeping Records)
- Publication 946 (How to Depreciate Property)
General S Corporation Information
- Form 100S Booklet (California S Corporation Franchise or Income Tax Return Instructions)
- FTB Pub. 1093 (Frequently Asked Questions: Qualified Subchapter S Subsidiaries (QSub))
- Form 1120 (U. S. Income Tax Return for an S Corporation)
- Publication 542 (Corporations)
Doing Business In and Out of California
- Publication 1050 (Application and Interpretation of Public Law 86-272)
- Publication 1061 (Guidelines for Corporations Filing a Combined Report)
- Schedule R (Apportionment and Allocation of Income)
Definitions of Basic Terms
- Domestic corporation
A domestic corporation is one that has endorsed Articles of Incorporation on file with the
Secretary of State.
The corporation remains in existence from the date the Secretary of State endorses the Articles of Incorporation and continues until it formally dissolves.
- Foreign corporation
A foreign corporation is a corporation incorporated or formed in another state or country.
It qualifies to do business in California by filing with the Secretary of State a "Statement and Designation by Foreign Corporation" and an original certificate of good standing from the state or country in which it incorporated.
Once a foreign corporation qualifies with the Secretary of State to do business in California it is subject to the franchise tax.
Important: A foreign corporation that does not qualify with the Secretary of State, but does business in California, is also subject to the franchise tax.
- Calendar year
A calendar year is an accounting period of 12 months ending on December 31.
- Fiscal year
A fiscal year is an accounting period of 12 months ending on the last day of any month other than December.
- Doing business
Doing business is defined as actively engaging in any transaction for the purpose of financial gain or profit.
- Qualified corporation
A qualified corporation is a foreign corporation that has qualified through the Secretary of State.
- Franchise tax
California imposes the corporate franchise tax on all corporations that do business in this state. The tax is for the privilege of exercising the corporate franchise in California.
- Minimum franchise tax
Except for newly incorporated or qualified corporations, all corporations doing business in California are subject to an annual minimum tax franchise tax of $800. This is true even if the corporation is inactive or operates at a loss during the year, and regardless of whether or not it did business for a full 12 months.