California is its own world when it comes to tax law, and if you or your clients do business in California, you must understand how the Golden State taxes residents, non-residents, and businesses.
Tax preparation pro Vicki Mulak knows California’s taxes better than almost anyone—she serves on two of the state’s three tax agency advisory boards and has won awards for her legislative advocacy and educational work. In her audio conference for Eli Financial, “California Tax Tutorial,” she goes in-depth into the state’s taxes, with particular attention to how state law determines income from California sources.
California State Tax Exposure Is Broad
California has high taxes: The individual rate is 13.3 percent, and the business rate is 8.84 percent. Sounds like a lot? It is, according to the Tax Foundation. The state has the nation’s highest individual income tax rate (by 3.4 percent) and is near the top third for corporate taxes.
Surprise: The American Bar Association notes that you could owe taxes to California even if you’ve never been there.
“If you live or do business in California,” wrote attorney Robert W. Wood, “state taxes are a big piece of what you pay, and surprisingly, you might have California tax exposure even if you never set foot in the Golden State. In fact, as many individuals and companies across the country and the world are aware, California aggressively draws people into its tax net.”
California law allows the state to tax you on all income it deems to be sourced from the state—even if you’re not a resident. And if California deems you a resident, it can tax you on all of your income, regardless of source. The state also taxes part-time residents based on how long they claimed residency.
The Sun Never Sets On the Opportunity to Audit
Determining California source income is not something that should be left to amateurs. As Wood noted, the state has declared that it has an unlimited amount of time to hunt you down if you fail to file an income tax return or if your return is deemed to be false or fraudulent.
“Not filing a California return—even if your belief was reasonable—means that the California statute of limitations to audit never runs,” Wood wrote. “Ever.”
And audits should be avoided, advised Evelyn Cook, a California-based certified public accountant.
“While not all audits will result in a huge tax bill or other negative tax consequences, the potential for a tax nightmare due to an IRS or [California Franchise Tax Board] audit is always possible,” she wrote.
That’s all the more reason to know California tax code—and to become proficient in solving issues unique to California state laws, says Mulak.
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