California LLC Franchise Tax Cut 2027: What SB 122 Means for New Businesses
California’s 2026-27 budget deal (SB 122, passed June 18, 2026) cuts the first-year annual franchise tax for new LLCs, limited partnerships, and LLPs from $800 to $400 — a 50% reduction effective for tax years 2027 through 2029. As of June 2026, the bill awaits Governor Newsom’s signature and is expected to be enacted. Roughly 250,000 new California businesses per year (Eytan Wallace / Assembly Budget Committee, June 2026) stand to benefit from this temporary relief window.
Written and reviewed by Adham Abadier, CPA — a California Board of Accountancy licensed Certified Public Accountant (License #158599) and founder of Catalyst CPA Corporation in Moreno Valley.
⚠️ Q2 Form 941 is 33 days away — July 31, 2026
New LLC owners with employees must file Form 941 by July 31, 2026, reporting income tax withholding, Social Security, and Medicare taxes. Late filing triggers a 2–15% penalty under IRC §6651.
Key Takeaways
- ✅ SB 122 (2026-27 CA budget trailer bill) halves the first-year LLC franchise tax from $800 to $400
- ✅ The $400 rate applies only to tax years 2027, 2028, and 2029 — it is temporary, not permanent
- ✅ Covers new LLCs, limited partnerships (LPs), and limited liability partnerships (LLPs) formed in California
- ✅ The prior AB 85 full first-year exemption (2021–2023) has expired; SB 122 replaces it with partial relief
- ✅ Starting in year two, the standard $800 annual minimum franchise tax (R&TC §17941) resumes
- ✅ Roughly 250,000 new CA businesses per year are affected — a major formation incentive
- ✅ Inland Empire entrepreneurs forming LLCs in 2027–2029 save $400 in year one under the new law
What SB 122 Actually Changes for New California LLCs
The Old Rule: AB 85’s First-Year Exemption (Now Expired)
From January 1, 2021 through December 31, 2023, FTB Publication 3556 confirmed that Assembly Bill 85 gave newly formed LLCs, LPs, and LLPs a complete first-year waiver of the $800 annual tax. That exemption is gone. LLCs formed in 2024, 2025, and through the end of 2026 owe the full $800 in year one, with no relief — a fact that has surprised many Inland Empire founders who assumed the exemption was still in effect.
The New Rule: SB 122’s 50% First-Year Reduction
California Senate Bill 122, the 2026-27 fiscal year budget trailer bill passed by the legislature on June 18, 2026, revives partial relief. Under SB 122, any LLC, LP, or LLP that organizes or registers with the California Secretary of State during tax years 2027, 2028, or 2029 pays $400 — not $800 — for its first year. The reduction is exactly 50%. From year two forward, the standard $800 minimum franchise tax under Revenue and Taxation Code §17941 (California Franchise Tax Board) applies as normal.
What This Does NOT Change
SB 122 only affects the flat annual franchise tax — it does not reduce the separate graduated LLC fee (up to $11,790 based on gross income plus cost of goods sold under R&TC §17942). It also does not affect C-corporations or S-corporations, which have their own first-year franchise tax rules. And it does not change the $800 rate for LLCs formed in 2024, 2025, or 2026 — those owners owe the full amount under current law.
Forming a California LLC in 2026 or planning a 2027 launch? Whether you’re capturing the $400 first-year rate or navigating the current $800 rule, the entity structure decision — LLC vs. S-Corp vs. sole proprietor — has far bigger tax consequences than the $400 difference. Adham reviews your specific numbers before you file.
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Why the Timing Window Matters — and Who It Affects
The Three-Year Window: 2027–2029 Only
SB 122’s relief is explicitly temporary. The Assembly Budget Committee’s June 15, 2026 trailer bill analysis confirms the $400 rate applies only to tax years beginning in 2027, 2028, and 2029. There is no guarantee the legislature will extend it beyond 2029. If you’re considering forming a California LLC and want to capture the reduced California LLC franchise tax rate, your entity must be registered with the California Secretary of State on or after January 1, 2027 — not December 31, 2026. Timing your formation date by even one day could mean the difference between paying $400 and $800.
Real Example: An Inland Empire Contractor Launching in 2027
Consider a residential contractor in Riverside County who is currently operating as a sole proprietor and plans to form an LLC in California to limit personal liability. If she registers with the Secretary of State on January 5, 2027, her first-year franchise tax under SB 122 is $400. If she registers December 15, 2026, she owes $800 for that short first year under current law — then $800 again for all of 2027. The SB 122 timing alone saves her $400, but the larger question is whether the LLC structure — or a subsequent S-Corp election — optimizes her self-employment tax. On $120,000 of net SE income, an S-Corp election typically saves $9,180 or more in self-employment tax annually (15.3% SE rate under IRC §1401 on net earnings).
The Broader Formation Context: Two Charges Still Apply
Even with the $400 first-year rate, new California LLCs face a two-charge system. The $400 (reduced from $800) is the flat franchise/annual tax. Separately, if the LLC’s California gross receipts plus cost of goods exceed $250,000, the graduated LLC fee under R&TC §17942 also applies — ranging from $900 to $11,790. Founders who expect strong first-year revenue need to budget for both. Our CPA advisory services can help model your full first-year California tax exposure before you file your Articles of Organization.
SB 122 vs. Prior Law: A Direct Comparison
| Formation Window | Law in Effect | First-Year Annual Tax | Year 2+ Annual Tax |
|---|---|---|---|
| Jan 1, 2021 – Dec 31, 2023 | AB 85 (expired) | $0 (full waiver) | $800 |
| Jan 1, 2024 – Dec 31, 2026 | No relief (current law) | $800 | $800 |
| Jan 1, 2027 – Dec 31, 2029 | SB 122 (pending signature) | $400 (50% cut) | $800 |
| Jan 1, 2030 onward | TBD (SB 122 expires) | $800 (unless extended) | $800 |
Sources: FTB Pub. 3556; Assembly Budget Committee Trailer Bill Analysis, June 15, 2026; EY Tax News (June 25, 2026).
Five Steps to Maximize SB 122 Relief When Forming Your California LLC
- Confirm your formation date. Your LLC’s first taxable year begins on the date the California Secretary of State stamps your Articles of Organization. A 2027 stamp qualifies for the $400 rate; a 2026 stamp does not.
- File your Statement of Information on time. California LLCs must file a Statement of Information (Form LLC-12) within 90 days of formation, then biennially, to remain in good standing. The fee is $20 per filing (California Secretary of State).
- Estimate your graduated LLC fee exposure. If you expect to exceed $250,000 in California gross receipts plus COGS in year one, the graduated fee (R&TC §17942) applies on top of the $400 flat tax. Model this before launch.
- Evaluate an S-Corp election for year two. The $400 savings is real — but far smaller than the SE-tax savings an S-Corp election can generate once your net income exceeds roughly $50,000–$60,000. Filing IRS Form 2553 by March 15 of the year the S-Corp election is to take effect locks in that planning.
- Set up clean books from day one. FTB audits of new LLCs often focus on first-year deductions and the graduated fee calculation. Starting with professional bookkeeping help from the first month avoids the costly catch-up work that typically runs $1,500–$6,000 when done retroactively.
“The $400 first-year rate under SB 122 is a genuine win for new California founders — but I always remind clients that the franchise tax is the cheapest line item in their first-year California tax bill. The graduated LLC fee, the self-employment tax on net income, and the missed S-Corp election deadline cost far more. Plan the whole picture before you file those Articles.”
Inland Empire LLC Formation Specialists
Is the California LLC Franchise Tax Cut Right for Your Launch Timeline?
Whether you’re planning a 2026 or 2027 formation, Adham runs the full first-year numbers — franchise tax, graduated LLC fee, SE tax exposure, and S-Corp election timing — so you launch with the optimal structure from day one.
Frequently Asked Questions: California LLC Franchise Tax & SB 122
When does the California LLC franchise tax drop to $400?
Under SB 122 (the California 2026-27 budget trailer bill), the $400 rate applies to new LLCs, LPs, and LLPs that organize or register with the California Secretary of State during tax years 2027, 2028, or 2029. LLCs formed before January 1, 2027 are not eligible — they owe the full $800 under current law.
Is the $400 first-year LLC tax rate permanent?
No. SB 122’s $400 rate is temporary and expires after tax year 2029. Beginning in 2030, the annual minimum franchise tax for new LLCs returns to $800 unless the California legislature passes additional legislation to extend or make the reduction permanent.
Does the $400 rate also apply to LPs and LLPs?
Yes. SB 122 reduces the first-year annual tax for limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs) from $800 to $400. Regular C-corporations and S-corporations are not covered by this provision — they have separate first-year franchise tax rules under the California Revenue and Taxation Code.
Does the $400 cut eliminate the graduated LLC fee?
No. The $400 first-year rate only affects the flat annual franchise/minimum tax. The separate graduated LLC fee under R&TC §17942 — which ranges from $900 to $11,790 based on California gross receipts — still applies in full if your LLC’s income exceeds the $250,000 threshold. You may owe both charges in year one.
What happened to the AB 85 first-year LLC exemption?
Assembly Bill 85 provided a complete first-year waiver of the $800 annual tax for LLCs, LPs, and LLPs formed between January 1, 2021 and December 31, 2023. That exemption expired at the end of 2023. LLCs formed in 2024, 2025, or 2026 owe the full $800, with no exemption or reduction currently available — SB 122’s relief does not begin until tax year 2027.
Should I wait until 2027 to form my California LLC just to save $400?
Waiting 6–12 months purely to save $400 rarely makes financial sense — you’d forego revenue, contracts, and liability protection in the interim. However, if you were already planning a 2027 launch date, be intentional about registering on or after January 1, 2027. The more important formation-year decision is entity type (LLC vs. S-Corp) and how quickly you set up your accounting structure. See our tax planning strategy page for a full breakdown.
How do I pay the California LLC annual franchise tax?
New LLCs pay the annual tax by the 15th day of the 4th month after the taxable year begins — typically April 15 for calendar-year filers — using FTB Form 3522 (LLC Tax Voucher). Under SB 122, first-year filers in 2027–2029 would remit $400 instead of $800 on that same voucher.
Does SB 122 affect how I elect S-Corp status for my LLC?
No. The S-Corp election process is a federal filing — IRS Form 2553 — and is independent of California’s annual franchise tax. California also requires a separate Form 3560 (California S Corporation Election or Termination/Revocation) filed with the FTB. Electing S-Corp status does not exempt you from the California $800 annual franchise tax; it changes how income is taxed at the federal level. Learn more about the S-Corp election process and how it interacts with your California LLC structure.
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Ready to Form Your California LLC the Right Way?
California’s new LLC franchise tax cut under SB 122 is a meaningful signal that the state is trying to lower the barrier to business formation. For Inland Empire entrepreneurs in Moreno Valley, Riverside, Corona, and Murrieta, it’s a $400 first-year win worth capturing — but the real leverage is in the entity structure, the S-Corp election timing, and clean financials from day one. Adham Abadier, CPA (License #158599) at Catalyst CPA Corporation helps Inland Empire founders build the right tax structure before they file a single Secretary of State form. Explore our full California small business CPA services or call (951) 223-1826 to speak with Adham directly.
By Adham Abadier, CPA — Licensed in California, License #158599
Last reviewed: June 28, 2026 by Adham Abadier, CPA (CA #158599).
Legal & Tax Disclaimer
This article is provided for general informational and educational purposes only. It does not constitute legal, tax, or accounting advice and does not create a CPA-client relationship. SB 122 was passed by the California legislature on June 18, 2026 and awaited Governor Newsom’s signature as of the last review date. Tax laws change frequently — verify current rules with the California Franchise Tax Board or consult a licensed CPA before making entity formation decisions. Catalyst CPA Corporation is licensed by the California Board of Accountancy. Results vary by individual circumstances.
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