California Tax Law: The Good, The Bad and the Ugly For Small Business Owners

Each year, tax codes change, which can become complicated for many small business owners. If you're not aware of the laws, you risk being penalized down the road, which can cause a huge financial blow. Sometimes, the changes to tax laws can benefit your business. If you're too busy to meet with a tax attorney, here is a general overview of the ways in which California's tax laws may impact your business.

 
The Good

In general, California as a whole was hit hard by the recession of 2008, causing many businesses to fold, but the state is on the rebound. One reason may be that it is easy to find tax incentives for operating a business in the state. Credits include incentives for research and development based businesses, environmentally friendly business practices, compliance with the Affordable Care Act and others. Not every business will qualify for incentives, but they are worth researching.

 
The Bad

Along with relatively high tax rates, California is one state in which small business owners may be subject to being taxed twice. Setting up a business as an LLC or an S-Corporation can be beneficial for many small businesses, however owners of these entities risk paying taxes for both their business and their personal income. An Investopedia blog post titled, "Taxes in California for Small Business: The Basics" advises, "Depending on several factors, including the net income of a pass-through entity and the amount of personal income derived from the business by its owners, this double taxation imposed by California can as much as double a small business owner's tax burden."

 
The Ugly

California's tax code is complicated, and it can be difficult to read, a fact that hasn't gone unnoticed by business owners. A "Business News Daily" article titled, "The State of Small Business: California" acknowledges that it's often necessary to seek professional help. "John Gillingham, owner of Gillingham CPA, said the costs of compliance can easily get out of hand. A business's tax burden can vary widely from county to county, or even from locality to locality, he said. His advice to small business owners is to consult not just with a professional, but with a local professional who knows the nuances of the community a business is operating in."

Understanding California's tax laws is one of the biggest challenges faced by business owners in the state, but it should not stop you from opening your business. Make sure you meet with a professional to understand how the code will affect you.

This article was written by Alaina Brandenburger for CBS Small Business Pulse.