Complete California tax guide: 8.84% corporate tax, $800 LLC minimum, 15% R&D credit, sales tax complexity, and why incorporating in Delaware doesn't avoid California taxes.
Updated October 2024 • 25 min read
Corporate Tax Rate
Top Personal Tax
R&D Credit Rate
Min LLC Tax
California remains the global epicenter of venture capital and tech startups. Despite the highest tax burden in the US, California attracts more startup investment than any other state.
Common misconception: incorporating in Delaware avoids California taxes. FALSE. If you have substantial nexus (employees, office, sales, operations), you pay California taxes regardless of incorporation state. Delaware provides legal benefits, but you'll register as foreign corporation in CA and pay CA taxes on CA-sourced income.
California imposes a flat 8.84% corporate income tax on all C-corporations doing business in the state.
Every corporation and LLC doing business in California must pay $800 minimum annually, even with no income or losses.
First-Year Exemption: New corporations exempt in year 1. LLCs must pay from first year.
LLCs with CA-source income over $250K pay additional annual fees based on total income (not net income):
| CA Income | Additional Fee |
|---|---|
| $250K - $500K | $900 |
| $500K - $1M | $2,500 |
| $1M - $5M | $6,000 |
| $5M+ | $11,790 |
California has the highest marginal personal income tax rate in the US, significantly impacting founder compensation and exits.
California does NOT recognize the federal QSBS exclusion (IRC §1202). While federal law allows 100% exclusion of gains up to $10M, California taxes the full gain at 13.3%. On a $10M QSBS exit, CA residents pay $1.33M in state tax.
California offers one of the most generous state R&D credits at 15% of QREs. Combined with 20% federal credit, total benefit reaches 35% of qualifying expenses.
Unlike federal R&D credits (refundable for startups), CA credits are strictly non-refundable. You can only reduce CA tax to zero. Unused credits carry forward indefinitely until you have CA tax liability to offset.
California has one of the most complex sales tax systems. Base rate is 7.25%, but local districts add taxes, resulting in total rates from 7.25% to 10.75%.
| City | Total Rate |
|---|---|
| San Francisco | 8.625% |
| San Jose | 9.375% |
| Palo Alto | 9.125% |
| Los Angeles | 9.5% |
| Santa Monica | 10.25% |
California's FTB aggressively enforces nexus rules. Even minimal connection can trigger filing obligations and tax liability.
CA sales threshold for sales tax nexus
Who Files:
Deadline:
Who Files:
Deadline:
Quarterly estimated taxes required if liability exceeds $500
| Quarter | Period | Due Date |
|---|---|---|
| Q1 | Jan-Mar | April 15 |
| Q2 | Apr-May | June 15 |
| Q3 | Jun-Aug | Sept 15 |
| Q4 | Sep-Dec | Jan 15 |
Incorporating in Delaware doesn't reduce CA tax burden if you have nexus in California.
Solution: Incorporate in DE for legal benefits, but plan for CA compliance from day one.
$800 minimum due even with $0 income. Penalties: 5%/month up to 25% plus interest.
Solution: Budget for $800 annual fee from day one. Set calendar reminders.
California AB5 has strict worker classification. Penalties include back taxes up to 30%.
Solution: When in doubt, classify as employee. Use proper payroll service.
15% CA + 20% federal = 35% of QREs. $1M in R&D = $350K in credits left on table.
Solution: Implement time tracking from day one. Consider R&D credit study.
Fee based on gross receipts, not net. $1M revenue = $6,000 fee even with losses.
Solution: Budget for fees as revenue grows. Consider C-corp conversion at $5M+.
Most VC-backed startups incorporate in DE but operate in CA, creating dual compliance obligations.
| Item | DE Only | DE + CA |
|---|---|---|
| Franchise Taxes | $400 | $1,200 |
| Tax Prep | $1,500 | $3,000-5,000 |
| Income Tax ($500K) | $0 | $44,200 |
| Total | ~$2,000 | ~$50,000+ |
DE C-Corp, 6 engineers in SF, $1.2M revenue, ($400K) loss
R&D credits alone returned 34x the cost of professional help.
C-Corps: No, exempt in year 1. LLCs: Yes, must pay from first year.
No. If you have CA nexus (employees, office, operations), you pay CA taxes regardless of incorporation state. DE provides legal benefits but doesn't avoid CA taxes.
Generally no. True SaaS accessed via internet without software download is not taxable. Downloaded software or physical media is taxable.
Yes, but CA credits are non-refundable. Unused credits carry forward indefinitely. Document R&D from day one.
Any CA employees (even remote), office/property, $500K+ in CA sales (sales tax), or $610K+ CA sales (income tax). Even one remote employee creates nexus.
No. CA taxes full gain at 13.3% despite federal QSBS exclusion. On $10M exit, CA residents pay $1.33M state tax.
For VC-backed startups, C-Corp is preferred: investors prefer it, can claim R&D credits, better for stock options, and LLCs pay higher fees at scale ($11,790 max vs $800).
5% penalty per month (up to 25%) plus interest. Can owe $1,000+ for $800 tax. FTB can suspend corporation/LLC.
California tax compliance is complex. Our startup tax specialists handle DE + CA dual compliance, R&D credits, nexus analysis, and minimize your tax burden while staying compliant.