Important New California Business Requirements

PEET Tax Program (For LLCs, Partnerships, and S Corporations)

California has created a way to get around the $10,000 limit on state and local tax deductions. Here's how it works:

• Your business pays an extra tax to California

• You get it back as a credit on your personal tax return

• This reduces your federal income, giving you a bigger federal deduction

Important deadlines:

• To get the full credit for 2025, you needed to make a reservation payment by June 15, 2025

• You can still get a reduced credit for late payments

• Pay the remainder by December 31, 2025, to maximize your benefit

Worker Classification Rules Got Stricter

California has made it much harder to classify workers as independent contractors instead of employees. The rules are now very narrow, and the penalties for getting it wrong are extremely high. You may need to start treating some contractors as employees.

Mandatory Retirement Plan Requirement

Deadline: December 31, 2025

If your California business doesn't offer a retirement plan to employees, you must register with CalSavers by December 31, 2025. This applies even if you're the only employee. The penalties are severe, so don't ignore this.

CalSavers is basically a payroll deduction Roth IRA program. You'll automatically deduct contributions from employee paychecks unless they opt out.

Unlimited State Disability Insurance

Starting in 2024, there's no cap on how much of your salary is subject to California State Disability Insurance tax. However, collecting SDI benefits as a business owner is difficult. Talk to your insurance agent about alternatives.

Smart Year-End Tax Moves

Pay Bills Early (Cash-Basis Businesses)

If your business reports income when received (not when earned), and you expect similar profits in 2025 and 2026:

• Pay all January 2026 bills in December 2025

• Using your credit card by December 31 counts as paying this year, even if you pay the credit card bill next year

Important: This only works with bank credit cards, not store cards like Office Depot or Staples

Buy Equipment Before Year-End

If you need to purchase equipment (including vehicles), consider doing it before December 31, 2025, to get the tax deduction this year.

Set Up Retirement Plans

401(k) plans (including solo 401(k)s): Much easier to set up before December 31, but you have until your tax filing deadline (including extensions) if needed.

SEP-IRAs: Always had the later deadline option.

Bonus credits available:

• Employer Auto Enrollment Credit for 401(k)s: $500

• Small Employer Pension Plan Startup Costs Credit: up to $5,000

Hire Family Members

If your spouse or children actively work in your business, consider officially hiring them so you can contribute to their retirement accounts too.

Avoid Common Tax Traps

Business Loss Deductions

If your LLC, partnership, or S corporation lost money, make sure you have enough "basis" (essentially, enough investment in the company) to deduct those losses. This is especially complicated for S corporation owners.

S Corporation Officer Salaries

If your S corporation had a profitable year, make sure you've paid officers (including yourself) reasonable salaries. Paying too little salary is a red flag that attracts IRS audits.

General Business Tax Tips

Employee Expense Reimbursements

Set up an "accountable plan" for reimbursing employees (including yourself) for business expenses like mileage. This makes the reimbursements tax-free to employees while keeping them tax-deductible for the business.

1099 Forms Preparation

The deadline for filing 1099 forms is coming up. Make sure you have:

• Legal names (not just business names)

• Correct addresses

• Tax ID numbers

If you're missing any information, ask contractors to complete Form W-9 immediately.

Important End-of-Year Tasks

Document Everything

• Business calendar: Print a hard copy of your 2025 business calendar to document business meals, travel, and car mileage during potential future audits

• Car mileage: Take a photo of your business vehicle's odometer on December 31

• Backup files: Make a backup copy of your QuickBooks or other bookkeeping files

• Inventory count: If you maintain inventory, count it as close to December 31 as possible

Organize Records

Pack up most of your 2024 business records, but keep 2025 records easily accessible for the next year.

Protect Your Business

• Review your plan for recovering from a cyberattack

• Consider adding cyber coverage to your business insurance

• Sobering fact: An estimated 60% of small companies hit by cyberattacks go out of business within six months

When to Get Professional Help

These strategies can save significant money, but business tax rules are complex and the penalties for mistakes can be severe. Consider working with a tax professional, especially for:

• PEET tax calculations

• Worker classification issues

• Basis calculations for business losses

• Setting up retirement plans

• S corporation salary requirements

The money spent on professional advice often pays for itself many times over in tax savings and avoided penalties.