Over the years I have noticed some reoccurring misconceptions when it comes to business taxes. In this post I am addressing some of the ones I have heard most frequently. If you have any questions about business taxes, please contact me at  (323) 380-8714, or Questions@EvansSvcs.com

If my business is registered in Nevada/Delaware I don’t have to pay state taxes even though my business operates in California. 

Generally if a Corporation or LLC  company does business in California, it must pay taxes to California. Doing business generally means the business has employees working in the state on behalf of the company, owns real, or personal (furniture, equipment computers, etc.) property in the state, or does a number of other activities in California. In addition, if your business operates in California, it is required to register to do business within California, regardless of where it was incorporated.

States such as Nevada and Delaware heavily promote using their states for incorporation. These states have favorable business laws that do a lot to protect a business and its shareholders in the event of a lawsuit. In addition, they have minimal business taxes, which are a great benefit to businesses operating in those states. Generally, those are the reasons why businesses choose incorporate in those states, but those advantages do not waive any requirements put forth by other states.

A Single Member LLC doesn’t have to pay taxes in California.

I addressed this in another post here, but the summary is that any LLC doing business in California, regardless of where it was formed is required to pay taxes in California. It pays to be aware of this rule, especially if you’re thinking of moving your Single Member LLC from another state to California.

The government cannot require shareholders/partners/corporate officers to pay unpaid business taxes. 

Under certain circumstances shareholders and/or corporate officers can be held personally responsible for business taxes. I always recommend that a business in trouble should pay its payroll and sales taxes before anything else for this exact reason. Typically these debts are not dischargeable in bankruptcy either. You don’t want to wind up making payments to the IRS or the State for 20 years because of a business error.

Credit/Debit card statements are just as good as actual receipts in case you’re audited.

The official stance of the IRS is that credit/debit card statements are not an acceptable substitute for actual receipts. While you may find that some IRS agents are willing to accept them to prove that a deduction is justified, most will not.

If the business pays for it, it’s automatically deductible. 

This one is sounds a little broad, but follow me. If your business pays for your car/home/non-business meals, the IRS will require that you allocate a portion of these expenses to personal use, and either deny the deduction at the business level, or require that the owner/shareholder report the portion of personal use on their personal tax return.

Choosing between starting a corporation, partnership, or LLC is very difficult. Each has its own advantages and disadvantages. Most self-help guides available only focus on Federal tax consequences. As a result, I see new clients each year that are very confused about why California is sending them a tax bill for having an LLC. This guide will explain California’s rules a bit more.

For Federal tax purposes, a Single Member LLC is treated as a part of its owner’s taxes. This means that Single Member LLC’s are (usually) reported on Schedule C or E of the Owner’s individual tax return, Form 1040. These LLC’s don’t file separate federal tax returns. Most states follow the same treatment for State tax returns. One notable exception is California.

Single Member LLC’s doing business in California must pay the $800 Franchise Tax Fee, and potentially a $900 or greater LLC fee, depending on the Gross Revenues (the amount of cash the LLC received for sales before expenses). In addition, Single Member LLC’s must also file an information return with the Franchise Tax Board.

Many people assume that their LLC is exempt from these taxes if it was formed in another state such as Nevada or Delaware. There is an exemption for LLC’s under very specific circumstances. If your LLC meets any of the following criteria, it is not exempt from California taxes:

• The LLC is registered with the CA Secretary of State
• The LLC owns or rents Real property (land, or buildings) in CA
• The LLC has an office in CA
• The LLC pays employees or the owner does work in CA for the Business

These are the most common reasons why a business will be required to pay taxes to California, but there are others. Please contact us at (323) 380-8714 or Questions@EvansSvcs.com if you have any questions about LLC taxes, or any tax notice you receive.