CA Gross Receipts Fee for LLCs Explained

Key Takeaways

• California imposes a minimum $800 franchise tax on all LLCs, plus an annual CA gross receipts fee if total California-sourced income exceeds $250,000.
• The CA gross receipts fee is calculated using a tiered schedule based on the LLC’s California-derived gross income, ranging from $900 to $11,790.
• This fee is in addition to any income taxes owed and is due even if the LLC operates at a loss.
• LLCs must file Form 568 annually, reporting their total California-sourced income to determine the gross receipts fee.
• Certain LLCs may qualify for exemptions from the $800 franchise tax in their first taxable year, but the gross receipts fee still applies if thresholds are met.
• Failure to pay can result in penalties, interest, and suspension of business rights in California.

LLC gross receipts tax is the gross income of the limited liability company. Before choosing to form an LLC, you should first be mindful of the benefits and drawbacks of the LLC, particularly in terms of the tax structure.

Generally, the Internal Revenue Service (IRS) disregards the LLC as a taxable entity. For that reason, the LLC must choose to be taxed as another type of business. For example, the LLC can choose to be taxed as a sole proprietorship (for single-member LLCs), a partnership, or a corporation.

Even though the LLC will be taxed as a different business, the company will still enjoy the many benefits of operating an LLC, which include limited liability protection, pass-through taxation (unless the LLC elects to be taxed as a C corporation), and greater flexibility in the management structure.

California Gross Receipts Tax

In 2010, the State of California created a new tax fee, referred to as the gross receipts tax, based on the LLC’s total income in the state.

In addition to a yearly $800 minimum franchise tax fee that is required of all California corporations or limited liability companies, there is also a gross receipts tax that is charged on every California LLC. Note that this tax is not imposed on the California corporation.

For the $800 minimum franchise tax fee, the entire amount is due, even if you form your business in the later part of the year. Therefore, it is not prorated. An exception does apply – and that is for businesses that have formed exceptionally late in the year (i.e. December), companies with no business activity in the State of California, nonprofit corporations with tax exemptions, some LLCs owned by developed members of the U.S. Armed Forces, and LLCs electing S corporation taxation.

The new gross receipts tax is clearly identified based on the company’s gross revenues. The Tax Resolution Institute believes as though the additional fee will further hinder the productivity and profitability of those people working in the state.

California LLCs are taxed at the state level in accordance with the California LLC Tax Schedule, which is based on gross revenue:

• $0-$249,999:$0
• $250,000-$499,999: $900
• $500,000-$999,999: $2,500
• $1mill-$4,999,999: $6,000
• $5mill and up: $11,790

Since most companies have to generate more than $250,000 in gross receipts to break even with what you had at the beginning of the taxable year, a California LLC will be required to pay a greater franchise tax than a California corporation.

In California, the S corp is taxed at a rate of 1.5% tax of the net income earned, whereas the LLC is taxed based on such above-mentioned gross receipts. This is the main reason why the LLC is taxed higher than the corporation.

For example, assume that you own a company with gross receipts in the amount of $2 million and profits of $100,000 for 2014. If you operate as an S corp, you must pay 1.5% of the $100,000 profit in taxes, which results in $1,500. However, if you operate as an LLC, then you must pay taxes of $6,000 based on the fact that you fall within the $1 million-$4,999,999 tax scale.

Calculating and Paying the CA Gross Receipts Fee

The CA gross receipts fee applies to all LLCs, foreign and domestic, doing business in California with more than $250,000 in California-sourced income. Gross receipts include the total amounts your LLC receives from all sources in the state, without deductions for expenses. This can include sales revenue, service income, and other business receipts attributable to California.

The annual fee is calculated using the state’s tiered schedule:

Key Points:

• The fee is not prorated for partial-year operations.
• It applies even if the LLC has no net profit.
• “California-sourced income” is based on where the sales or services occur, not where the LLC is registered.
• LLCs must pay this fee in addition to the $800 franchise tax.

Payment is made using California Form 568 (Limited Liability Company Return of Income), which is due by the 15th day of the 4th month after the close of your tax year (April 15 for most LLCs). If estimated gross receipts exceed $250,000, the LLC must also pay the LLC Estimated Fee using Form 3536 by the 15th day of the 6th month of the tax year (June 15 for most).

Single-Member LLC in California

If you operate as a single-member LLC in the State of California, then you will be considered a disregarded entity for both federal and state tax purposes. Therefore, you will need to report all profits and losses on your personal tax return (Schedule C of Form 1040).

However, if you operate a single-member LLC and pay sales taxes to California for your company sales, then you must file a business tax return, which is referred to as Form 568.

If you failed to pay taxes in the prior taxable year after you’ve paid sales tax, then you will be provided with a questionnaire about the work you or your employees did for the business as well as requests for detailed inventory, equipment, where your business does business, and where you hold your products (i.e. warehouse or storage center). Thereafter, California will probably determine that you must file Form 568. If this is the case, you’ll want to be sure to file this form every year thereafter to prevent additional penalties.

Exemptions, Penalties, and Compliance Tips

While most LLCs are subject to both the $800 franchise tax and the gross receipts fee, there are limited exemptions:

• First-year exemption: LLCs formed in California after January 1, 2021, may be exempt from the $800 franchise tax in their first taxable year, but the CA gross receipts fee still applies if thresholds are met.
• Inactive LLCs: Entities with no California-sourced income are exempt from the gross receipts fee but must still meet filing requirements.
• Certain nonprofit LLCs with tax-exempt status are exempt from both fees.

Penalties for Noncompliance:Failure to file or pay on time can result in:

• Late payment penalty of 5% of the unpaid tax plus 0.5% per month until paid.
• Interest charges on unpaid amounts.
• Suspension or forfeiture of the LLC’s right to do business in California by the Franchise Tax Board.

Compliance Tips:

• Keep accurate records of California-sourced income to determine your correct fee tier.
• File Form 568 and make payments on time to avoid penalties.
• If unsure of your classification or income sourcing, consult a tax professional familiar with California LLC taxation.

Frequently Asked Questions

1. What counts as California-sourced income for the CA gross receipts fee?
   Income from sales, services, or property located in California counts, regardless of where your LLC is registered.
2. Do I have to pay the CA gross receipts fee if my LLC operates at a loss?
   Yes. The fee is based on gross income, not profit.
3. When is the CA gross receipts fee due?
   It is paid with Form 568 by the 15th day of the 4th month after the end of your tax year, with estimated fees via Form 3536 due mid-year.
4. Can new LLCs avoid the gross receipts fee in their first year?
   No. While the $800 franchise tax may be waived for the first year, the gross receipts fee still applies if income thresholds are met.
5. What happens if I don’t pay the CA gross receipts fee?
   Penalties, interest, and possible suspension of your LLC’s right to do business in California.

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