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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 3743
Experience:  Providing Financial, Tax & Business advice since 1986
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A client of ours is looking to open a new office in California.

Resolved Question:

A client of ours is looking to open a new office in California. Currently, they have an office in NY and are paying corporate federal, state, MTA and city taxes on their profits from their NY office.

Upon opening the office in California, our client is expecting to have to pay corporate taxes in CA, although they are concerned on what basis profits chargeable to corporation taxes will be assessed there.

The office they're looking to open in CA will only have 1-2 sales staff to begin with but it is expected that there will be significant income from these sales staff, with directly attributable expenditure being relatively low (salary, commissions, office rent & ancillaries) as the majority of the expenditure relating to the sales will be incurred in either the NY office or in the United Kingdom, where their parent company is based. Therefore, on face value, the profits in CA will be artificially high. Note there is a transfer pricing agreement in place between the UK & the US registered entity.

They're looking for further clarification on how their profits chargeable to corporate taxes in CA will be determined.
Submitted: 10 months ago.
Category: Finance
Expert:  Lane replied 10 months ago.

Lane :

Hi,

Lane :

This is from a flyer that CA puts out for foreign corporations an other business entities (foreign simply meaning incorporated in another state, and doing business in California) - I'll give you the link:

Lane :

Corporation Franchise Tax
You are responsible for the corporation franchise tax if your
corporation or limited liability company treated as a
corporation is doing business in California. Doing business in
California is defined as actively engaging in any transaction
in California for the purpose of financial gain or profit.
Foreign corporations that are general partners of partnerships
or members of limited liability companies (treated as
partnerships for tax purposes) doing business in California
are also responsible for the corporation franchise tax.

Lane :

  • A C corporation is taxed on its net income at a rate of 8.84 percent. Entities formed as corporations under civil law and LLCs that elect to be taxable as a C corporation are subject to a minimum tax of $800.

Lane :

  • An S corporation is taxed on its net income at a rate of 1.5 percent for California purposes. S corporations are not subject to income tax for federal income tax purposes.

Lane :

Further, foreign corporations should be aware of California’s worldwide combined reporting method of taxation. In contrast to


the arm’s-length, separate accounting method employed by the U.S. federal government, California’s system calculates a
business enterprise’s income taxes by treating as a single enterprise all of the worldwide affiliates of a multinational
business group that are engaged in a so-called “unitary” business. Once the worldwide income is determined, it is divided
between California and the rest of the world on the basis of a three-factor apportionment formula of property, payroll,
and sales.

Lane :

This document will answer all of your questions:


California's Corporation Taxes - California Franchise Tax Board

Lane :

A foreign corporation (a corporation, association or other legal entity that is not incorporated in California) that conducts intrastate business in
California must obtain a Certificate of Qualification to do business in California. Any corporation, whether it is a Delaware, Swedish, Texas, or Mexican corporation that “does business” or “derives income from sources within California” is generally subject to California’s tax laws.

Lane :

There are credits in NY for taxes paid to other states, so you will not be COMPLETELY subjected to DOUBLE taxation, but the net effect will be that the taxes will be effetcively taxed at the higher of the two.

Lane :

Hope this helps

Lane :

Let me know if you have further questions

Lane :

Lane

Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 3743
Experience: Providing Financial, Tax & Business advice since 1986
Lane and 5 other Finance Specialists are ready to help you
Expert:  Lane replied 10 months ago.
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