Statutory Authority & Basics
- Law. California taxes C-corporations at a flat 8.84 percent on net income (10.84 percent for banks/financials) under R&TC § 23151, applied on Form 100.
- Minimum Franchise Tax. Every C-corp also owes $800 each year, due with the first quarter estimate—even if inactive or loss-making.
- Federal Overlay. C-corps pay IRC § 11 federal tax (21 percent) and file IRS Form 1120; California starts with federal taxable income and makes state adjustments (R&TC §§ 24341-24452).
How the 8.84 % Really Works for Venture Funding
| Scenario | Federal Tax (21 %) | CA Tax (8.84 %) | Combined* | Notes |
|---|---|---|---|---|
| Profitable AI SaaS (Year 3) | $2 M × 21 % = $420 k | $2 M × 8.84 % = $176.8 k | 29.84 % | Double taxation applies later if dividends paid. |
| Breakeven R&D Phase | $0 | $800 minimum | — | NOL generated; CA allows 80 % offset of future income. |
| Loss Year After Seed Round | NOL | $800 | — | CA NOL carryforward: 20 years; no carryback. |
| *Excludes potential 3.8 % net investment income tax and shareholder-level federal/state tax on dividends. |
Five Factors to Weigh in 2025
| Factor | Why It Matters for AI Founders |
|---|---|
| Double Tax vs. QSBS Exclusion | Stock held 5 years under IRC § 1202 may avoid federal capital-gain tax on exit; S-corp/LLC equity cannot. |
| Investor Preferences | VCs usually insist on Delaware C-corp; California still levies income/franchise tax once “doing business” nexus is met under R&TC § 23101. |
| R&D Credit Offsets | California R&D credit ( R&TC § 23609) is 15 % of qualified excess expenses; can wipe out much of the 8.84 % once profitable. |
| AMT Exposure | C-corp alternative minimum tax rate is 6.65 %; see discussion below. ([Business tax rates |
| IPO or M&A Exit | Public companies must be C-corps; converting later can trigger built-in-gains tax (IRC § 1374) if coming from S-corp. |
Step-by-Step Compliance Checklist
- Form the Delaware C-Corp; qualify to do business in California (SOS Form DBA-Foreign).
- Register with FTB for tax ID; calendar reminder: Form 100 due by the 15th day of the 4th month after year-end (April 15 for calendar corps).
- Pay $800 Minimum with Form 100-ES voucher for Q1.
- Maintain GAAP Books; isolate California-source income for apportionment under R&TC § 25128 (single sales factor).
- Track NOLs & Credits—use FTB Schedule C for NOLs, Form 3523 for R&D credit.
- Model Dividends vs. Retained Earnings; plan cash needs to avoid trapped earnings tax at exit.
Worked Example — TensorForge, Inc.
| Year | CA Net Income | 8.84 % Tax | CA R&D Credit | Tax Payable |
|---|---|---|---|---|
| 2025 | ($3,000,000) loss | $800 minimum | — | $800 |
| 2026 | $500,000 | $44,200 | $44,200 | $0 (credit offsets) |
| 2027 | $4,000,000 | $353,600 | $120,000 | $233,600 |
Result: despite the flat rate, targeted use of the CA R&D credit and prior-year NOLs can keep effective state tax well below 8.84 %.
Conclusion
A California C-corp’s 8.84 percent headline rate is only one piece of the puzzle. For venture-backed AI companies seeking QSBS treatment, large equity rounds, and an eventual IPO, the C-corp still dominates—provided founders actively harvest credits, manage NOLs, and plan for double taxation at exit.
Call to Action
Need a custom forecast comparing C-corp, S-corp, and LLC outcomes for your 2025 funding plan? Schedule a strategy meeting with Anshul Goyal, CPA EA FCA: https://calendly.com/anshulcpa/
Disclaimer
Anshul Goyal, CPA EA FCA, is a licensed Certified Public Accountant in the United States and an Enrolled Agent admitted to practice before the IRS. He represents clients in tax litigation and advises American businesses and Indians living in the United States on cross-border compliance. This article is for educational purposes only and does not constitute tax advice; consult your own professional regarding your circumstances.
Top 5 FAQs
| Question | Short Answer |
|---|---|
| 1. Does California waive the $800 minimum for new C-corps? | No—unlike LLCs and S-corps formed after 2020, C-corps still owe $800 in year 1. |
| 2. Can C-corps elect the PTET? | No—C-corps and corporate partners are ineligible for the PTET credit. |
| 3. Is the 8.84 % subject to a surtax in certain industries? | Banks and financials pay 10.84 %; most tech companies pay 8.84 %. |
| 4. How does the 6.65 % AMT interact with credits? | If AMT exceeds regular tax, pay the AMT; unused credits may generate a Minimum Tax Credit carryforward. |
| 5. Can QSBS exclude California capital gains? | California conforms to IRC § 1202 for qualified small-business stock if requirements are met. |
About Our CPA
With 15 years of U.S. and international tax expertise, Anshul Goyal, CPA EA FCA has prepared more than 20,000 returns and saved clients over $200 million. As Managing Partner of Kewal Krishan & Co., he guides AI and SaaS founders through entity choice, R&D credits, and venture-scale tax strategy.