C Corp vs S Corp in California

The $800 minimum franchise tax

Every California corporation (C or S) owes at least the $800 minimum franchise tax to the Franchise Tax Board each year, regardless of income. The exception is the first year: the FTB states that newly incorporated or qualified corporations are not required to pay the minimum franchise tax in their first taxable year.

This is independent of the percentage-based franchise tax. An S corp with $100,000 net income pays the greater of $800 minimum or 1.5% of net income ($1,500), so it owes $1,500.

Source: California FTB S Corporations; FTB Corporations (first-year rule)

The 1.5% S corp franchise tax

California imposes a 1.5 percent franchise tax on the net income of S corporations, on top of the personal income tax shareholders pay on the pass-through K-1. This is unusual: most states either tax the S corp shareholders only (pass-through) or treat the S corp like a C corp at the entity level. California does both.

For a California S corp with $500,000 net income, the entity owes $7,500 in state franchise tax (1.5 percent of $500k). Shareholders then pay California personal income tax on the same $500,000 on their personal returns at graduated rates; the top 13.3 percent (12.3 percent plus the 1 percent Mental Health Services Tax) applies only to taxable income above $1 million.

Worked example: $400k profit California operator

Indicative example. Personal tax depends on filing status, deductions, and total income. PTET workaround (next section) may reduce the impact for S corp owners.

The PTET workaround for SALT cap

California adopted Pass-Through Entity Tax (PTET) in 2021 under AB 150 (codified at Cal. Rev. and Tax. Code Sections 17052.10, 19900-19906). S corps and partnerships may elect to pay an entity-level 9.3 percent tax on qualified net income; the federal deduction at the entity level effectively sidesteps the federal SALT cap ($40,400 for 2026 under IRC 164(b)(7) per the IRS, reduced toward a $10,000 floor once modified AGI exceeds $505,000) for shareholders.

For a California S corp with $400,000 of qualified net income, the PTET election pays $37,200 at the entity level, and shareholders receive a credit on their California personal returns for the same amount, while taking the federal deduction at the entity level. At a 37 percent federal marginal rate, moving that $37,200 deduction to the entity level is worth up to $13,764 federally (37 percent of $37,200), to the extent the cap would otherwise have blocked it. The election is available for taxable years beginning before 1 January 2031, following the extension in SB 132 (2025).

Source: California FTB Pass-Through Entity Elective Tax