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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7359
Experience:  15years with H & R Block. Divisional leader, Instructor
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Question about California income tax vis-a-vis a new incorporation.

Resolved Question:

Question about California income tax vis-a-vis a new incorporation.
Planning on having an e-commerce business with warehousing in California. All inventory will arrive and be stored in California, and shipped out from california, but the customer concentration will be nationwide. 70% of staff will be from california, 40-60% of shareholders will be from California. Answers to the "where to incorporate" question tend to bring up the minimum franchise tax of CA, but our real concern is about what happens to income tax when profits are in the +$500,000 range.

As a result, is it better to incorporate in Nevada/Delaware instead of California? Will this prevent us from paying California Income tax? Especially on sales not in California? A secondary question is, if CA incorporation is the answer, is the S-Corp the best bet while shareholder numbers are small, to minimize tax burden?
Submitted: 11 months ago.
Category: Tax
Expert:  Robin D. replied 11 months ago.

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
Unfortunately even if you incorporate in Nevada or some other state, you will be doing business in California and will not escape the need to register there even as a foreign corp.
Using the S corp would most likely be better because the corp will not be taxed too on the same profits.


California has adopted most of the federal provisions for S corporations. However, if you are a federal S corporation
doing business in California or having California source income, you are subject to the franchise or income tax at the
corporate level in addition to the shareholder tax on the passthrough income.




Robin D. :

S corporations that do business in California and other states must apportion their unitary business income using Schedule R, Apportionment and Allocation of Income.

Robin D. :

For CA purposes, doing business is defined as actively engaging in any transaction for the purpose of financial gain or profit.

Customer:

Hi Robin, thanks for the assistance today! Can I get a clarification?

Robin D. :

Certainly

Customer:

Even if we as a foreign corp register to do business in California, isn't it the case that the foreign corp will only be taxed on profit related to revenues made on California Sales? and all other sales will be taxed at the state level in whichever state we are incorporated in?

Robin D. :

That is the allocation of income I mentioned. S corporations that do business in California and other states must apportion their unitary business income using Schedule R, Apportionment and Allocation of Income.

Customer:

Ah. Ok, so that is the Schedule R that needs to be filed since we are "doing business in" California as a foreign corp (S or C status)... which means we will have some tax savings for being a foreign corp? (ie on anything that is allocated OUTSIDE of CA)....

Robin D. :

Correct

Robin D. :

Would you like a very well written letter on this subject?

Robin D. :

It covers more than you could think to ask about.

Customer:

HA! I could ask A LOT! :) , yes a letter would be very beneficial.

Robin D. :

Very easy read too

Robin D. :

I really enjoyed working with you – please feel free to request me again when you come back to ask another question.
You will find the request feature when you come back under your MY QUESTIONS section.


 

Customer:

OK that's great. THanks. And as a question to that, you are experienced with Corporate tax code at state level, in case I have more detailed questions?

Robin D. :

Most issues, I will not pretend that I know everything.

Robin D. :

You are most welcome.
Your positive rating is always thanks enough.

Customer:

OK. I'll wrap my head around some of this and get back to you. Thanks Robin; positive rating on the way!

Robin D. :

Best wishes

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7359
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and other Tax Specialists are ready to help you

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