California has long been a state known for its progressive policies, and in 2025, the state introduced one of the most significant changes to its corporate tax system in decades. The new law, which is set to take effect in January 2026, aims to provide a more equitable tax system that addresses concerns over tax avoidance and ensures that businesses of all sizes contribute their fair share to the state’s revenue.
One of the main features of the new law is the introduction of a tiered tax system for corporations based on their annual revenue. Small businesses with revenues below $5 million will benefit from a lower tax rate, while larger corporations with revenues above $5 million will face higher tax rates. The idea behind this tiered structure is to provide relief to small businesses, which are often seen as the backbone of California’s economy. Small businesses, which make up the majority of companies in the state, will have more room to grow without being burdened by high tax rates.
However, the law also places a significant focus on ensuring that large corporations, particularly tech companies, pay their fair share. California is home to some of the world’s largest and most profitable tech companies, many of which have faced criticism for using complex tax strategies to minimize their tax liabilities. The new law aims to close some of the loopholes that have allowed large corporations to avoid paying taxes on a significant portion of their income.
To achieve this, the new law includes stricter reporting requirements for all businesses, including detailed disclosures of profits, expenses, and tax deductions. Businesses will be required to disclose more information about their international operations, including any efforts to shift profits to low-tax jurisdictions. The California Department of Tax and Fee Administration (CDTFA) will use this data to monitor compliance and take enforcement action against companies that attempt to exploit loopholes or evade taxes.
Corporate law experts have had mixed reactions to the new law. Supporters argue that it represents a long-overdue effort to ensure that businesses contribute fairly to the state’s revenue. They contend that the law will help level the playing field, particularly for small businesses that have struggled to compete with larger corporations that can afford expensive tax strategies. Supporters also argue that the law will help address California’s growing budget deficit, which has been exacerbated by the COVID-19 pandemic and rising public spending.
Critics, however, have expressed concerns about the potential negative impact the new law could have on businesses. While the tiered tax structure is designed to provide relief for smaller companies, many worry that the higher tax rates for larger corporations could lead to job losses, especially in industries like tech and manufacturing. Some companies may be forced to relocate out of California in search of lower tax rates, potentially hurting the state’s economy in the long term.
Another concern is the increased compliance burden that the new reporting requirements will place on businesses. Many smaller companies may struggle to meet the new disclosure requirements, especially if they do not have the resources to hire dedicated tax professionals or invest in expensive accounting software. For these businesses, the new law could result in higher administrative costs and greater complexity in tax filings.
Despite these concerns, California Governor Gavin Newsom has expressed strong support for the new tax law. He argues that the law is necessary to ensure that the state’s largest corporations contribute their fair share to the state’s economy. Newsom has also stated that the law will help reduce income inequality by redistributing resources more equitably.
The law also includes provisions aimed at reducing corporate tax evasion. California has long struggled with companies using offshore tax havens to avoid paying taxes on profits earned within the state. The new law will require companies to disclose their offshore activities and report any efforts to shift profits to low-tax jurisdictions. Failure to comply with these rules could result in significant fines and penalties.
The new corporate tax law in California represents a significant shift in the state’s tax policy and is expected to have far-reaching implications for businesses across the state. While small businesses stand to benefit from lower tax rates, larger corporations may face higher costs and greater scrutiny. Regardless of how businesses react to the law, it is clear that California is taking bold steps to ensure that its corporate tax system is more equitable and transparent.
