The impact of Tax Reform on small businesses in California

Tax reform is a significant factor influencing the financial health and operations of small businesses in California. With ongoing regulatory changes, understanding and adapting to these changes is important for sustainability and growth. Let’s take a look at how the financial impact of recent tax reforms shapes business planning, reporting and resource allocation.

Understanding the changes

Recent new tax laws have introduced a wave of compliance requirements that small businesses in California must navigate. These changes, accompanied by periodic IRS updates have created a complex environment where staying informed is more critical than ever. 

California imposes three types of income taxes on businesses: a corporate tax, a franchise tax, and an alternative minimum tax. Almost all California businesses are subject to at least one.

The corporate tax of a flat 8.84% applies to corporations and LLCs treated as corporations. This rate is higher than the U.S. average and applies to net taxable income. Corporations are not subject to the franchise tax, but they are subject to the alternative minimum tax (AMT) while the franchise tax applies to S corporations, LLCs, limited partnerships (LPs) and limited liability partnerships (LLPs).

Limitation on Business Tax Credits:

Businesses are limited to claiming a total of $5 million in credits under both the Corporation and Personal Income Tax laws including carryovers. Certain credits such as personal income tax credits and the low-income housing credit are excluded from this limitation. The carryover periods for unused credits are extended by the number of years the credit is disallowed.

Suspension of Net Operating Loss (NOL) Deductions:

For tax years beginning on or after January 1, 2024, and before January 1, 2027, California has suspended NOL deductions for businesses with net business income or modified adjusted gross income exceeding $1 million. This suspension does not apply to taxpayers with income below this threshold. Additionally, the existing 20-year carryforward period for NOLs is extended by up to three years if losses are unused.

Franchise Tax:

To alleviate the financial burden on new small businesses, LPs, LLPs and LLCs not classified as corporations are exempt from the annual tax until they earn $20,000 or more in gross receipts. Corporations are similarly exempt from the minimum franchise tax until they reach $20,000 in gross receipts. 

Alternative Minimum Tax (AMT):

California imposes an AMT on corporations including LLCs that elect C corporation status, at a rate of 6.65%. This tax applies when a corporation’s regular tax liability is less than the AMT and prevents corporations from effectively writing down income to minimize their corporate tax.

Reporting Requirements for Third-Party Payment Platforms:

The American Rescue Plan Act introduced a provision requiring businesses to report payments exceeding $600 received through third-party payment platforms like PayPal, Venmo, and Zelle. While the IRS has delayed implementing this requirement, small businesses should prepare for future compliance. 

For small business owners, understanding these changes is the first step in staying compliant with evolving regulations.

Adapting your tax strategy

Prepared for the latest tax reforms? Confident you’re maximizing your savings and staying compliant? Now is the time to prioritize strategic tax planning and make the necessary financial adjustments. With CPA assistance you can navigate California tax laws and develop a robust financial strategy that aligns with the new regulatory landscape.

The new year is almost here — make sure you’re leveraging 2025 tax changes to benefit your business and thrive for success.