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Important Tax Information for Doing Business In California

What Is Considered "Doing Business" in California?

If you are “doing business” in California, it is important to know that you are subject to California tax laws. Three criteria must be met to be considered as “doing business” by California law.

What Is the Criteria to Be a California Business?

  1. Are involved in any transaction for the purpose of financial gain within the state of California.
  2. The principal place where the business is directed or managed is located in California.
  3. Your sales in California, payroll, or property exceed any of the following amounts:
Year CA Sales
(Sales exceed the threshold amount or 25% of sales)
CA Real or Tangible Personal Property
(Real or tangible personal property exceeds the threshold amount or 25% of the total property)
CA Payroll Compensation
(Payroll compensation exceeds the threshold amount or 25% of total payroll)
2020 $610,395 $61,040 $61,040
2019 $601,967 $60,197 $60,197
2018 $583,867 $58,387 $58,387
2017 $561,951 $56,195 $56,195
2016 $547,711 $54,771 $54,711
2015 $536,446 $53,644 $53,644
2014 $529,562 $52,956 $52,956

What About Partnerships/LL/S Corporations?

***Please Note: Any distributive share of the property, payroll, or sales from a partnership, LLC treated as a partnership, or S Corporation must be included.

What is Public Law 86-272?

Public Law 86-272 applies to any company outside of California that solicits the sale of tangible property to California customers. If you quality under this law, you are exempt from state taxes based on your net income. Any out-of-state entities doing business in California must still file a tax return unless exceptions apply.

What Are California Apportionment and Allocation Rules?

If you are a business or trade with income inside and outside the state of California, you may be subject to the California apportionment and allocation rules.

This includes:

  • Limited Liability Companies
  • Corporations
  • Partnerships 
  • Sole-proprietorships

What is Apportionment?

An apportionment formula is used to divide business income among states. If you have business income both inside and outside of California, you are required to apportion that income.

What is Considered Business Income?

Business income is income earned in your business from property used for your business, or income earned regularly. If the transactions contribute to the operations of the business as a whole, this is considered business income. Income from the sale of a business, asset, or right is also considered business income by California law. Any nonbusiness income is not subject to apportionment.

Forms and Instructions Can Be Found Here:

What Are the Apportionment Formulas Used?

There are two formulas for apportionment used regarding business income: The Single-Sales Factor Formula and the Three-Factor Formula.

What is the Single-sales Factor Formula?

All businesses or trades must apportion their business income to California using the single-sales factor. This excludes those that derive more than 50% of their gross receipts from qualified business activities(“QBA”).

What is the Three-factor Formula?

All businesses or trades that derive more than 50% of their gross receipts from QBA must use the three-factor formula. This includes property, payroll, and single-weighted sales factor to apportion business income to California.

What QBA’s Are Included?

  • Extractive
  • Savings and loan
  • Agricultural
  • Banking or financial

For help with the single sales factor formula and three-factor formula refer to the Schedule R Instructions, and form locator for help with prior years.

What is Considered Nonbusiness Income in California?

  • Extractive
  • Savings and loan
  • Agricultural
  • Banking or financial

For help with the single sales factor formula and three-factor formula refer to the Schedule R Instructions, and form locator for help with prior years.

What is California Net Income?

California net income is any apportioned business income plus any allocated nonbusiness income to California.

Please refer to the Apportionment and Allocation of income Schedule R for help with calculating nonbusiness income. The form locator can be used for any prior years.

For help with doing business in California, or for help with Apportionment and allocation please visit the following links.

Have Any Questions About California Business Laws?

If you have any questions or need help understanding the California Business law requirements, please contact Launch CPA LLP for more information. We are always available, and would be happy to help you at any of our locations! 

We have a CPA in San Diego, a CPA in San Francisco, and a CPA in Los Angeles that would be happy to assist you!

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