Last week, we discussed how and why many business owners are considering leaving California to lower-tax states. There are many logistics and laws that need to be reviewed before making such a drastic move. First, you must understand the rules of California residency taxation.
Simply moving your business and/or your residence out of state isn’t an automatic solution to high-tax problems. It only works in certain situations. Careful research and planning must be done to avoid pitfalls and truly take advantage of lower-tax situations in other states—all while minimizing any potential tax liabilities in California.
It helps to understand the basic rules of how the state of California taxes its residents, nonresidents and businesses.
For individual residents of California, the state will tax their “global” income. No matter where you earn your income—in-state, out-of-state, overseas—it is subject to income taxation in California. In general, California residents will be required to pay taxes on all income they make. There may be credits available to allow for tax payments to other stations. There also may be other strategies you can implement to minimize your California state income taxes. As with all tax planning, you want to strategically work all the tax laws in your favor as much as you legally can.
The California residency taxation laws differ greatly for nonresident. For those who live out-of-state, California state taxes are only collected on income that derives from a California source. This may be worked you performed here or income from a business or assets based here. If you do business in California or you earn income from a California-based company, you will be subject to California state taxes on that income only.
The income tax rules are actually pretty similar for businesses as they are for individuals. California can tax any business operating out of California on all taxable revenue. This is regardless of where their customers are. If you run an e-commerce business, but you are based here, all of your sales are subject to California state taxes.
A business that is based outside of California will only be taxed on sales made to California customers. This can get complicated, especially with online sales. If the business is a pass-through entity, such as an LLC or S-corporation, then the tax falls on the owners—whether or not they are California residents. In other words, California essentially requires owners of pass-through entities to treat income, credits and deductions of their business entities as personal income, credits and deductions.
As you can see, California has one of the most complex tax systems in the country and obviously we are known for our high tax rates. Whether you are considering starting a business in this state or you are thinking about moving all or part of your business or residency out of state, there are so many California residency taxations details to cover. The more you understand, the smarter moves you can make to minimize your tax liabilities.
For all your California business tax planning needs, talk to Illumination Wealth. We are a California-based company and we know how to help you navigate these complicated financial matters. Contact us today to set up an introductory business planning consultation.