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Each year we receive a number of inquiries regarding clients who want to move their Corporation out of California or form a new out-of-state corporation to cut their tax costs. Most often the client will want to incorporate in Nevada.

This strategy will only be successful if the corporation is not doing business in California and the shareholder or shareholders are not California residents.

California residents are taxed on all income they receive regardless of source, therefore any salary, dividends, interest or S Corporation income (if applicable) would be taxed anyway.

The real issue is the California unitary tax, which will cause part or all of the corporations income to be taxed if it does any business within the state.

Under California law a Corporation or a combined group of Corporations must apportion income to California by using the ratio of payroll, property and sales in California to total payroll, property and sales. If the Corporation is filing sales tax returns, payroll tax returns or owns/leases property in California and is not filing a California corporate return, the state will want to know why.

The state also has the power to reallocate income to California if it determines that the out-of-state corporation is merely a tax avoidance technique and to assess substantial penalties along with the taxes and interest.

As with most things in life, if something seems to good to be true, it probably is.

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