California’s New Gross Receipts Fee On LLCs Leads To Tax Problems In San Jose (Silicon Valley) And San Diego

In 2010, California has instituted a new tax fee that is based on LLC’s “Total Income” in the state. In addition to the annual $800 minimum franchise tax fee imposed on every California Corporation and every California Limited Liability Company, this second “Gross Receipts Tax” is imposed on every California LLC, but not on California corporations. Yes, that is absolutely the truth.

In the tough economic climate of California, a LLC must pay a second additional tax on its gross revenues. Since tax problems with California and tax problems with the IRS are becoming more common for California businesses, the Tax Resolution Institute believes that this additional fee will only hurt the productivity and profitability of working in the state. When businesses are crunched like LLCs will be by the gross receipts fee, cutting corners with payroll taxes is often the next dangerous step taken.

The gross receipts tax on a California limited liability company is as follows:

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Since most businesses need to generate at least $250,000 in gross receipts just to break even, the California LLC will have to pay a higher franchise tax than a California corporation. Whether the LLC is operating at a real loss, it will not matter. By contrast, no California corporation is subject to a gross receipts tax. Like most other forms of businesses (sole proprietorships, partnerships, trusts), a California corporation only pays tax on its net taxable income (with the exception of California’s state minimum franchise tax of $800 which is applied toward the taxes owed).

LLCs — An Essential Part Of A Healthy Economy

As a result, LLCs with tax challenges are leaving the state, rather than paying the additional taxes. Following in the footsteps of larger companies, many LLCs, ranging from San Jose to San Diego, are discovering that other states will offer them tax breaks and support that California has chosen to rescind.

For example, the experience of Genentech, a large biotech company with a plant in Oceanside, underscores the need for the tax credits, according to supporters. Frustrated with California’s tax laws, Genentech expanded in Oregon, bringing a $400 million facility and 300 jobs to Hillsboro despite having available land in California. Oregon offered some of the same tax breaks California did not have at the time and may now repeal. “California’s tax structure didn’t support in-state growth,” said Caroline Pecquet, a Genentech spokeswoman.

Gross Receipts Fee On LLCs Is Bad For California

Realizing that the state tax laws are hurting industry expansion, the Los Angeles City Council recently voted 10 to 0 to waive the business tax for the next three years for companies that move into the city and receive more than $500,000 in yearly gross receipts. The council also extended an existing tax break for new, smaller businesses until Dec. 31, 2012. Backers of the proposal, including Mayor Antonio Villaraigosa, said they expected the changes to create 55,000 jobs and prevent new businesses from choosing other cities over Los Angeles and other states over California despite the tax resolution problems in the state.

The Tax Resolution Institute agrees with the decision by the Los Angeles City Council to waive business taxes and disagrees with the new gross receipts fee instituted by the state on LLCs. The health of Limited Liability Corporations is essential for California’s future. As a result, the Tax Resolution Institute is here to provide the best in tax resolution services and payroll tax relief with the Employment Development Department to LLCs. We want to keep the new business ventures in state where they belong.