Overview of the Bank and Corporation Tax in California
Out of the 48 states, California is the one to tax corporate profits. Whereas, the bank and corporation tax of California remains the third largest source of General Fund revenues of the state. The raise in 1999-00 amounted to about $6.1 billion or 9 percent of the total. All corporations that earn income derived from the sources in California are allied to BCT. But, insurance companies and nonprofit corporations like churches and charitable organizations are exempted, since they do pay a gross premium tax.
Somewhere around half million corporations file BCT returns in California, but only 60 percent from them actually report profit and only those pay taxes to BCT. Whereas, the rest of them result in loss and are subjected to pay only the minimum tax of the state. Profit recovering firms are further distributed among the different industry sectors. Manufacturing firms are subjected to pay almost one-third of all BCT taxes.
The corporate franchise tax, corporate income tax and bank tax are three different types of taxes described by BCT. In order to do business in California, most businesses in the state are liable to pay corporate income tax, while those businesses that do not have adequate presence or activity in the state also need to pay this tax as a part of franchise tax. Financial institutions and banks pay the bank tax.
BCT includes three components and is mainly calculated on income, with the franchise tax dominating the accounts for over 98 percent of BCT revenues.
Key Features of BCT
. Depending on the profit, a basic tax rate of 8.84 percent and a minimum of $800 tax during the two years of operation of the firm need to be paid. Whereas, a higher rate of 10.84 percent is applied to banks and financial institutions, in order to exempt them from certain local levies.
. Similar to the personal income tax or PMT, corporations are also subjected to an Alternative Minimum Tax or AMT. But, the tax is applied at a slightly lower rate of 6.64 percent.
. The corporations whose income flows-through and is taxed on shareholders PIT returns, pay a reduced tax rate of 1.5 percent.
. In cases of loss, there is a right to carry forward a percentage of the net operating losses or NOL during the year, in order to reduce taxable profits in subsequent years.
. They provide a wide range of exclusions, deductions, income exemptions, as well as tax credits.
Relationship to Federal Law
The Federal Corporate Tax Law provides more beneficent depreciation allowances, does not duty an entity-level tax on Subchapter S corporations and allows 100 percent of NOL to be carried forward.
Taxation of S Corporations
Businesses that obtain the restricted liability benefits of a corporation are termed as S corporations and are taxed like a partnership.
. They pay a reduced corporate income tax rate of 1.5 percent.
. They cant go for alternative minimum tax, but need to choose the same minimum tax requirement like other corporations do.
Taxing National and International Corporations
In terms of calculating taxable profits, for the corporate businesses in California, the process is very simple. In such cases, California profits coordinate the difference within receipts and permissible deductions. The businesses that file under BCT are California-based corporations. But 75 percent of corporate income is accumulated from multi-state and multinational corporations.
Comparisons to Other States
As compared to other states the basic BCT rate of California which is 8.84% is relatively high. This BCT burden is a bit above average as compared to the U.S, 0.7 percent versus 0.5 percent.
The BCT Future
The growth of BCT has occurred substantially in these recent two years. The NOL that generated previously, but not yet claimed also affect the future BCT growth.