Out of State California S Corp Shareholders in for a Surprise

California has always mandated that for all distributions to out-of-state S Corporation shareholders, 7% be withheld for state income tax to the Franchise Tax Board. However, there was no enforcement of this mandate. That’s changed for 2007.

The Franchise Tax Board will now enforce this. So if you’re an out-of-state shareholder in a California S Corporation, you’ll be getting 93% of what you thought you’d get. Exemptions are available if you’ve been filing (and paying) California state income tax, or you can demonstrate to the FTB that the withholding rate is higher than your actual tax rate.

Hat Tip: Jeff Quin, North Lake Tahoe Bonanza

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