AB 612: Minimum franchise tax: annual tax: small business.
- Session Year: 2015-2016
- House: Assembly
- Latest Version Date: 2015-03-12
Existing law imposes an annual minimum franchise tax, except as provided, on every corporation incorporated in this state, qualified to transact intrastate business in this state, or doing business in this state. Existing law exempts a corporation that incorporates or qualifies to do business in this state from the payment of the minimum franchise tax in its first taxable year.
Existing law imposes an annual tax in an amount equal to the minimum franchise tax on every limited partnership, limited liability company, and limited liability partnership doing business in this state. In addition, existing law requires every limited partnership that has filed a certificate with the Secretary of State and every foreign limited partnership that has registered with the Secretary of State, every limited liability company if the articles of organization have been accepted by, or a certificate of registration has been issued by, the Secretary of State, and every registered limited liability partnership and every foreign limited liability partnership that has registered with the Secretary of State, to pay an annual tax in an amount equal to the minimum franchise tax.
This bill would reduce that minimum franchise in the 2nd taxable year for a new corporation, and that annual tax in the first taxable year for a new limited partnership, new limited liability partnership, and new limited liability company that is a small business, which is defined as a business entity with gross receipts of $5,000 or less, as specified.
This bill would take effect immediately as a tax levy.
The Corporation Tax Law imposes an alternative minimum tax in substantial conformity to the alternative minimum tax imposed by the federal income tax laws, but provides an exception so that certain credits may reduce the regular tax, as defined, below the tentative minimum tax, as provided.
This bill would make nonsubstantive changes to this provision.
The Corporation Tax Law imposes an alternative minimum tax in substantial conformity to the alternative minimum tax imposed by the federal income tax laws, but provides an exception so that certain credits may reduce the regular tax, as defined, below the tentative minimum tax, as provided.
This bill would make nonsubstantive changes to this provision.
(a)For each taxable year beginning on or after January 1, 1997, every limited partnership doing business in this state (as state, as defined by Section 23101) 23101, and required to file a return under Section 18633 shall pay annually to this state a tax for the privilege of doing business in this state in an amount equal to the applicable amount specified in paragraph (1) of subdivision (d) of Section 23153.
(b)(1)In addition to any limited partnership that is doing business in this state and therefore is subject to the tax imposed by subdivision (a), for each taxable year beginning on or after January 1, 1997, every limited partnership that has executed, acknowledged, and filed a certificate of limited partnership with the Secretary of State pursuant to Section 15621 or 15902.01 of the Corporations Code, and every foreign limited partnership that has registered with the Secretary of State pursuant to Section 15692 or 15909.01 of the Corporations Code, shall pay annually the tax prescribed in subdivision (a). The tax shall be paid for each taxable year, or part thereof, until a certificate of cancellation is filed on behalf of the limited partnership with the office of the Secretary of State pursuant to Section 15623, 15696, 15902.03, or 15909.07 of the Corporations Code.
(2)If a taxpayer files a return with the Franchise Tax Board that is designated its final return, that board shall notify the taxpayer that the tax imposed by this chapter is due annually until a certificate of cancellation is filed with the Secretary of State pursuant to Section 15623, 15696, 15902.03, or 15909.07 of the Corporations Code.
(c)The tax imposed by this chapter shall be due and payable on the date the return is required to be filed under former Section 18432 or 18633.
(d)For purposes of this section, limited partnership means any partnership formed by two or more persons under the laws of this state or any other jurisdiction and having one or more general partners and one or more limited partners.
(e)Notwithstanding subdivision (b), any limited partnership that ceased doing business prior to January 1, 1997, filed a final return with the Franchise Tax Board for a taxable year ending before January 1, 1997, and filed a certificate of dissolution with the Secretary of State pursuant to Section 15623 of the Corporations Code prior to January 1, 1997, shall not be subject to the tax imposed by this chapter for any period following the date the certificate of dissolution was filed with the Secretary of State, but only if the limited partnership files a certificate of cancellation with the Secretary of State pursuant to Section 15623 of the Corporations Code. In the case where a notice of proposed deficiency assessment of tax or a notice of tax due (whichever is applicable) is mailed after January 1, 2001, the first sentence of this subdivision shall not apply unless the certificate of cancellation is filed with the Secretary of State not later than 60 days after the date of the mailing of the notice.
(f)(1)Notwithstanding subdivisions (a) and (b), for taxable years beginning on or after January 1, 2016, every new limited partnership that is a small business shall pay to the state an annual tax of four hundred dollars ($400) for its first taxable year.
(2)For purposes of this subdivision:
(A)Gross receipts, less returns and allowances reportable to this state, means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120.
(B)New limited partnership means a limited partnership that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. New limited partnership does not include any limited partnership that began business operations as, or acquired its business operations from, a sole proprietorship, a limited liability partnership, or any other form of business entity prior to its organization.
(C)Small business means a limited partnership that has gross receipts, less returns and allowances, reportable to this state for the taxable year of five thousand dollars ($5,000) or less.
(3)This subdivision shall not apply to a limited partnership that does not file a return on the due date of its return, without regard to extension, for that year.
(4)This subdivision shall not apply to any limited partnership that reorganizes solely for the purpose of reducing its annual tax.
SEC. 2.Section 17941 of the Revenue and Taxation Code is amended to read:17941.(a)For each taxable year beginning on or after January 1, 1997, a limited liability company doing business in this state (as defined in Section 23101) shall pay annually to this state a tax for the privilege of doing business in this state in an amount equal to the applicable amount specified in paragraph (1) of subdivision (d) of Section 23153 for the taxable year.
(b)(1)In addition to any limited liability company that is doing business in this state and is therefore subject to the tax imposed by subdivision (a), for each taxable year beginning on or after January 1, 1997, a limited liability company shall pay annually the tax prescribed in subdivision (a) if articles of organization have been accepted, or a certificate of registration has been issued, by the office of the Secretary of State. The tax shall be paid for each taxable year, or part thereof, until a certificate of cancellation of registration or of articles of organization is filed on behalf of the limited liability company with the office of the Secretary of State.
(2)If a taxpayer files a return with the Franchise Tax Board that is designated as its final return, the Franchise Tax Board shall notify the taxpayer that the annual tax shall continue to be due annually until a certificate of dissolution is filed with the Secretary of State pursuant to Section 17707.08 of the Corporations Code or a certificate of cancellation is filed with the Secretary of State pursuant to Section 17708.06 of the Corporations Code.
(c)The tax assessed under this section shall be due and payable on or before the 15th day of the fourth month of the taxable year.
(d)For purposes of this section, limited liability company means an organization, other than a limited liability company that is exempt from the tax and fees imposed under this chapter pursuant to Section 23701h or Section 23701x, that is formed by one or more persons under the law of this state, any other country, or any other state, as a limited liability company and that is not taxable as a corporation for California tax purposes.
(e)Notwithstanding anything in this section to the contrary, if the office of the Secretary of State files a certificate of cancellation pursuant to Section 17707.02 of the Corporations Code for any limited liability company, then paragraph (1) of subdivision (f) of Section 23153 shall apply to that limited liability company as if the limited liability company were properly treated as a corporation for that limited purpose only, and paragraph (2) of subdivision (f) of Section 23153 shall not apply. Nothing in this subdivision entitles a limited liability company to receive a reimbursement for any annual taxes or fees already paid.
(f)(1)Notwithstanding any provision of this section to the contrary, a limited liability company that is a small business solely owned by a deployed member of the United States Armed Forces shall not be subject to the tax imposed under this section for any taxable year the owner is deployed and the limited liability company operates at a loss or ceases operation.
(2)The Franchise Tax Board may promulgate regulations as necessary or appropriate to carry out the purposes of this subdivision, including a definition for ceases operation.
(3)For the purposes of this subdivision, all of the following definitions apply:
(A)Deployed means being called to active duty or active service during a period when a Presidential Executive order specifies that the United States is engaged in combat or homeland defense. Deployed does not include either of the following:
(i)Temporary duty for the sole purpose of training or processing.
(ii)A permanent change of station.
(B)Operates at a loss means a limited liability companys expenses exceed its receipts.
(C)Small business means a limited liability company with total income from all sources derived from, or attributable, to the state of two hundred fifty thousand dollars ($250,000) or less.
(4)This subdivision shall become inoperative for taxable years beginning on or after January 1, 2018.
(g)(1)Notwithstanding any provision of this section to the contrary, for taxable years beginning on or after January 1, 2016, every new limited liability company that is a small business shall pay to the state an annual tax of four hundred dollars ($400) for its first taxable year.
(2)For purposes of this subdivision:
(A)Gross receipts, less returns and allowances reportable to this state, means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120.
(B)New limited liability company means a limited liability company that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. New limited liability company does not include any limited liability company that began business operations as, or acquired its business operations from, a sole proprietorship, a limited liability company or any other form of business entity prior to its organization.
(C)Small business means a limited liability company that reasonably estimates that it will have gross receipts, less returns and allowances, reportable to this state for the taxable year of five thousand dollars ($5,000) or less.
(3)This subdivision shall not apply to a limited liability company that does not file a return on the due date of its return, without regard to extension, for that year.
(4)If the limited liability companys gross receipts, as determined by subparagraph (A) of paragraph (2), are not five thousand dollars ($5,000) or less, an additional tax in the amount equal to four hundred dollars ($400) for the taxable year shall be due and payable by the corporation on the due date of its return, without regard to extension, for that year.
(5)This subdivision shall not apply to any limited liability company that reorganizes solely for the purpose of reducing its annual tax.
SEC. 3.Section 17948 of the Revenue and Taxation Code is amended to read:17948.(a)For each taxable year beginning on or after January 1, 1997, every limited liability partnership doing business in this state (as defined in Section 23101) and required to file a return under Section 18633 shall pay annually to the Franchise Tax Board a tax for the privilege of doing business in this state in an amount equal to the applicable amount specified in paragraph (1) of subdivision (d) of Section 23153 for the taxable year.
(b)In addition to any limited liability partnership that is doing business in this state and therefore is subject to the tax imposed by subdivision (a), for each taxable year beginning on or after January 1, 1997, every registered limited liability partnership that has registered with the Secretary of State pursuant to Section 16953 of the Corporations Code and every foreign limited liability partnership that has registered with the Secretary of State pursuant to Section 16959 of the Corporations Code shall pay annually the tax prescribed in subdivision (a). The tax shall be paid for each taxable year, or part thereof, until any of the following occurs:
(1)A notice of cessation is filed with the Secretary of State pursuant to subdivision (b) of Section 16954 or 16960 of the Corporations Code.
(2)A foreign limited liability partnership withdraws its registration pursuant to subdivision (a) of Section 16960 of the Corporations Code.
(3)The registered limited liability partnership or foreign limited liability partnership has been dissolved and finally wound up.
(c)The tax assessed under this section shall be due and payable on the date the return is required to be filed under Section 18633.
(d)If a taxpayer files a return with the Franchise Tax Board that is designated as its final return, the Franchise Tax Board shall notify the taxpayer that the annual tax shall continue to be due annually until a certificate of cancellation is filed with the Secretary of State pursuant to Section 16954 or 16960 of the Corporations Code.
(e)(1)Notwithstanding subdivisions (a) and (b), for taxable years beginning on or after January 1, 2016, a new limited liability partnership that is a small business shall pay to the state an annual tax of four hundred dollars ($400) for its first taxable year.
(2)For purposes of this subdivision:
(A)Gross receipts, less returns and allowances reportable to this state, means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120.
(B)New limited liability partnership means a limited liability partnership that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. New limited liability partnership does not include any limited liability partnership that began business operations as, or acquired its business operations from, a sole proprietorship, a limited liability partnership, or any other form of business entity prior to its organization.
(C)Small business means a limited partnership that has gross receipts, less returns and allowances, reportable to this state for the taxable year of five thousand dollars ($5,000) or less.
(3)This subdivision shall not apply to a limited liability partnership that does not file a return on the due date of its return, without regard to extension, for that year.
(4)This subdivision shall not apply to any limited partnership that reorganizes solely for the purpose of reducing its annual tax.
SEC. 4.Section 23153 of the Revenue and Taxation Code is amended to read:23153.(a)Every corporation described in subdivision (b) shall be subject to the minimum franchise tax specified in subdivision (d) from the earlier of the date of incorporation, qualification, or commencing to do business within this state, until the effective date of dissolution or withdrawal as provided in Section 23331 or, if later, the date the corporation ceases to do business within the limits of this state.
(b)Unless expressly exempted by this part or the California Constitution, subdivision (a) shall apply to each of the following:
(1)Every corporation that is incorporated under the laws of this state.
(2)Every corporation that is qualified to transact intrastate business in this state pursuant to Chapter 21 (commencing with Section 2100) of Division 1 of Title 1 of the Corporations Code.
(3)Every corporation that is doing business in this state.
(c)The following entities are not subject to the minimum franchise tax specified in this section:
(1)Credit unions.
(2)Nonprofit cooperative associations organized pursuant to Chapter 1 (commencing with Section 54001) of Division 20 of the Food and Agricultural Code that have been issued the certificate of the board of supervisors prepared pursuant to Section 54042 of the Food and Agricultural Code. The association shall be exempt from the minimum franchise tax for five consecutive taxable years, commencing with the first taxable year for which the certificate is issued pursuant to subdivision (b) of Section 54042 of the Food and Agricultural Code. This paragraph only applies to nonprofit cooperative associations organized on or after January 1, 1994.
(d)(1)Except as provided in paragraph (2), paragraph (1) of subdivision (f) of Section 23151, paragraph (1) of subdivision (f) of Section 23181, and paragraph (1) of subdivision (c) of Section 23183, corporations subject to the minimum franchise tax shall pay annually to the state a minimum franchise tax of eight hundred dollars ($800).
(2)The minimum franchise tax shall be twenty-five dollars ($25) for each of the following:
(A)A corporation formed under the laws of this state whose principal business when formed was gold mining, which is inactive and has not done business within the limits of the state since 1950.
(B)A corporation formed under the laws of this state whose principal business when formed was quicksilver mining, which is inactive and has not done business within the limits of the state since 1971, or has been inactive for a period of 24 consecutive months or more.
(3)For purposes of paragraph (2), a corporation shall not be considered to have done business if it engages in business other than mining.
(e)Notwithstanding subdivision (a), for taxable years beginning on or after January 1, 1999, and before January 1, 2000, every qualified new corporation shall pay annually to the state a minimum franchise tax of five hundred dollars ($500) for the second taxable year. This subdivision shall apply to any corporation that is a qualified new corporation and is incorporated on or after January 1, 1999, and before January 1, 2000.
(1)The determination of the gross receipts of a corporation, for purposes of this subdivision, shall be made by including the gross receipts of each member of the commonly controlled group, as defined in Section 25105, of which the corporation is a member.
(2)Gross receipts, less returns and allowances reportable to this state, means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120.
(3)Qualified new corporation means a corporation that is incorporated under the laws of this state or has qualified to transact intrastate business in this state, that begins business operations at or after the time of its incorporation and that reasonably estimates that it will have gross receipts, less returns and allowances, reportable to this state for the taxable year of one million dollars ($1,000,000) or less. Qualified new corporation does not include any corporation that began business operations as a sole proprietorship, a partnership, or any other form of business entity prior to its incorporation. This subdivision shall not apply to any corporation that reorganizes solely for the purpose of reducing its minimum franchise tax.
(4)This subdivision shall not apply to limited partnerships, as defined in Section 17935, limited liability companies, as defined in Section 17941, limited liability partnerships, as described in Section 17948, charitable organizations, as described in Section 23703, regulated investment companies, as defined in Section 851 of the Internal Revenue Code, real estate investment trusts, as defined in Section 856 of the Internal Revenue Code, real estate mortgage investment conduits, as defined in Section 860D of the Internal Revenue Code, qualified Subchapter S subsidiaries, as defined in Section 1361(b)(3) of the Internal Revenue Code, or to the formation of any subsidiary corporation, to the extent applicable.
(5)For any taxable year beginning on or after January 1, 1999, and before January 1, 2000, if a corporation has qualified to pay five hundred dollars ($500) for the second taxable year under this subdivision, but in its second taxable year, the corporations gross receipts, as determined under paragraphs (1) and (2), exceed one million dollars ($1,000,000), an additional tax in the amount equal to three hundred dollars ($300) for the second taxable year shall be due and payable by the corporation on the due date of its return, without regard to extension, for that year.
(f)(1)(A) Notwithstanding subdivision (a), every corporation that incorporates or qualifies to do business in this state on or after January 1, 2000, shall not be subject to the minimum franchise tax for its first taxable year.
(B)Notwithstanding subdivision (a), every corporation that is a new corporation in taxable years beginning on or after January 1, 2016, and is a small business in its second taxable year shall pay to the state a minimum franchise tax of four hundred dollars ($400) for its second taxable year.
(i)For purposes of this subparagraph:
(I)Gross receipts, less returns and allowances reportable to this state, means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120.
(II)New corporation means a corporation that on or after January 1, 2016, is incorporated under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its incorporation. New corporation does not include any corporation that began business operations as, or acquired its business operations from, a sole proprietorship, a corporation or any other form of business entity prior to its incorporation.
(III)Small business means a corporation that reasonably estimates that it will have gross receipts, less returns and allowances, reportable to this state for the taxable year of five thousand dollars ($5,000) or less.
(ii)(I)This subparagraph shall not apply to a corporation that does not file a return on the due date of its return, without regard to extension, for that year.
(II)If the corporations gross receipts, as determined by subclause (I) of clause (i) of subparagraph (B), are not five thousand dollars ($5,000) or less, an additional tax in the amount equal to four hundred dollars ($400) for the taxable year shall be due and payable on the due date of its return, without regard to extension, for that year.
(2)This subdivision shall not apply to limited partnerships, as defined in Section 17935, limited liability companies, as defined in Section 17941, limited liability partnerships, as described in Section 17948, charitable organizations corporations, as described in Section 23703, regulated investment companies, as defined in Section 851 of the Internal Revenue Code, real estate investment trusts, as defined in Section 856 of the Internal Revenue Code, real estate mortgage investment conduits, as defined in Section 860D of the Internal Revenue Code, and qualified Subchapter S subsidiaries, as defined in Section 1361(b)(3) of the Internal Revenue Code, to the extent applicable.
(3)This subdivision shall not apply to any corporation that reorganizes solely for the purpose of avoiding payment of its minimum franchise tax.
(g)Notwithstanding subdivision (a), a domestic corporation, as defined in Section 167 of the Corporations Code, that files a certificate of dissolution in the office of the Secretary of State pursuant to subdivision (b) of Section 1905 of the Corporations Code, prior to its amendment by the act amending this subdivision, and that does not thereafter do business shall not be subject to the minimum franchise tax for taxable years beginning on or after the date of that filing.
(h)The minimum franchise tax imposed by paragraph (1) of subdivision (d) shall not be increased by the Legislature by more than 10 percent during any calendar year.
(i)(1)Notwithstanding subdivision (a), a corporation that is a small business solely owned by a deployed member of the United States Armed Forces shall not be subject to the minimum franchise tax for any taxable year the owner is deployed and the corporation operates at a loss or ceases operation.
(2)The Franchise Tax Board may promulgate regulations as necessary or appropriate to carry out the purposes of this subdivision, including a definition for ceases operation.
(3)For the purposes of this subdivision, all of the following definitions apply:
(A)Deployed means being called to active duty or active service during a period when a Presidential Executive order specifies that the United States is engaged in combat or homeland defense. Deployed does not include either of the following:
(i)Temporary duty for the sole purpose of training or processing.
(ii)A permanent change of station.
(B)Operates at a loss means negative net income as defined in Section 24341.
(C)Small business means a corporation with total income from all sources derived from, or attributable, to the state of two hundred fifty thousand dollars ($250,000) or less.
(4)This subdivision shall become inoperative for taxable years beginning on or after January 1, 2018.
SEC. 5.This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.
SECTION 1.Section 23453 of the Revenue and Taxation Code is amended to read:23453.(a)There shall be allowed as a credit against the regular tax, as defined by subdivision (c) of Section 23455, for any taxable year, an amount equal to the minimum tax credit for that taxable year.
(b)For purposes of subdivision (a), the minimum tax credit shall be determined in accordance with Section 53 of the Internal Revenue Code, relating to credit for the prior year minimum tax liability, except as otherwise provided in this part.
(c)For purposes of this chapter, the amount determined under Section 53(c)(1) of the Internal Revenue Code shall be the regular tax, as defined by subdivision (c) of Section 23455, reduced by the sum of the credits allowable under this part other than any credit which reduces the tax below the tentative minimum tax, as defined by Section 23455.
(a)There shall be allowed as a credit against the regular tax (as tax, as defined by subdivision (c) of Section 23455), 23455, for any taxable year, an amount equal to the minimum tax credit for that taxable year.
(b)For purposes of subdivision (a), the minimum tax credit shall be determined in accordance with Section 53 of the Internal Revenue Code, relating to credit for the prior year minimum tax liability, except as otherwise provided in this part.
(c)For purposes of this chapter, the amount determined under Section 53(c)(1) of the Internal Revenue Code shall be the regular tax, as defined by subdivision (c) of Section 23455, reduced by the sum of the credits allowable under this part other than any credit which reduces the tax below the tentative minimum tax, as defined by Section 23455.
|
Date
|
Status
|
|---|---|
| Feb 24, 2015 | Read first time. To print. |
| Feb 25, 2015 | From printer. May be heard in committee March 27. |
| Mar 12, 2015 | From committee chair, with author's amendments: Amend, and re-refer to Com. on REV. & TAX. Read second time and amended. |
| Mar 12, 2015 | Referred to Com. on REV. & TAX. |
| Mar 16, 2015 | Re-referred to Com. on REV. & TAX. |
| May 4, 2015 | In committee: Set, first hearing. Referred to suspense file. |
| May 18, 2015 | Retained in suspense file. |
| Jan 31, 2016 | Died pursuant to Article IV, Sec. 10(c) of the Constitution. |
| Feb 1, 2016 | From committee: Filed with the Chief Clerk pursuant to Joint Rule 56. |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
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Organization
|
Position
|
Date
|
|---|---|---|
| Fresno Chamber of Commerce | ** Support | May 4, 2015 |
| National Federation Of Independent Business | * Support | May 4, 2015 |
| National Federation Of Independent Business | * Indeterminate | May 4, 2015 |
| Page M | ** Support | May 4, 2015 |
| State Board of Equalization, 1st District, Vice Chair | ** Support | May 4, 2015 |
| State Board of Equalization, 4th District, Board Member | ** Support | May 4, 2015 |
AB 612
Page 7
Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 612 (
Patterson) – As Amended March 12, 2015
SUSPENSE
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Minimum franchise tax: annual tax: small business.
SUMMARY: Reduces the minimum franchise tax to $400 in the second taxable year for a new corporation, and reduces the annual tax in the first taxable year for a new limited partnership (LP), new limited liability partnership (LLP), and new limited liability company (LLC) that is a small business. Specifically, this bill:
Provides, beginning on or after January 1, 2016, that every new LP, LLC, and LLP defined as a small business shall pay an annual tax of $400 for its first taxable year.
Provides, beginning on or after January 1, 2016, that every new corporation defined as a small business shall pay a minimum franchise tax of $400 for its second taxable year.
Defines a "small business" as an LP or LLP that has gross receipts, less returns and allowances, reportable to this state for the taxable year of $5,000 or less.
Defines a "small business" as a corporation or an LLC that reasonably estimates that it will have gross receipts, less returns and allowances, reportable to this state for the taxable year of $5,000 or less.
Defines "gross receipts, less returns and allowances reportable to this state" as, the sum of the gross receipts from the production of business income, and the gross receipts from the production of nonbusiness income.
Defines a "new LP" as, an LP that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. A “new LP” does not include any LP that began business operations as, or acquired its business operations from, a sole proprietorship, a LLP, or any other form of business entity prior to its organization. This reduction in the annual tax shall not apply to any LP that reorganizes solely for the purpose of reducing its annual tax.
Defines a “new LLC” as, an LLC that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. A “new LLC” does not include any limited liability company that began business operations as, or acquired its business operations from, a sole proprietorship, a limited liability company or any other form of business entity prior to its organization. This reduction in the annual tax shall not apply to any LLC that reorganizes solely for the purpose of reducing its annual tax.
Defines a “new LLP” as, an LLP that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. A “new LLP” does not include any limited liability partnership that began business operations as, or acquired its business operations from, a sole proprietorship, a limited liability partnership, or any other form of business entity prior to its organization. This reduction in the annual tax shall not apply to any LP that reorganizes solely for the purpose of reducing its annual tax.
Defines a “new corporation” as, a corporation that on or after January 1, 2016, is incorporated under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its incorporation. “New corporation” does not include any corporation that began business operations as, or acquired its business operations from, a sole proprietorship, a corporation or any other form of business entity prior to its incorporation. This reduction in the minimum franchise tax shall not apply to any corporation that reorganizes solely for the purpose of avoiding payment of its minimum franchise tax.
Provides that reduction in the annual and minimum franchise tax shall apply to corporations, LPs, LLCs, or LLPs only if they file a timely return.
Provides that if the LLC or corporation's gross receipts exceed $5,000, an additional tax in the amount equal to $400 shall be paid on the due date of its return for the taxable year, without regard to extension.
Takes effect immediately as a tax levy.
EXISTING LAW:
Imposes franchise tax on all corporations doing business in California equal to 8.84% of the taxable income attributable to California. A minimum franchise tax of $800 is imposed on all corporations that are incorporated under the laws of California, qualified to transact intrastate business in California, or are doing business in California. Taxpayers must pay the minimum franchise tax only if it is more than their regular franchise tax liability.1
Provides exceptions with respect to imposition of the minimum franchise tax. For instance, credit unions and nonprofit organizations are not subject to the minimum franchise tax and a corporation is not subject to the minimum franchise tax for its first taxable year. However, even though a corporation is not subject to the minimum tax in its first taxable year, it will be subject to franchise tax in its first taxable year based on its taxable income.
Provides that LPs, LLPs, and LLCs that are doing business in California, registered or qualified to do business in California, or formed in this state, are subject to annual tax in an amount equal to the minimum franchise tax, currently set at $800. These entities (known as 'pass-through entities') are not subject to any tax based on taxable income. Rather, the items of income, gain, loss, deduction and credit are passed-through to the owners and reported on their respective income or franchise tax returns.
Provides that real estate mortgage investment conduits (REMICs) and financial asset securitization investment trusts (FASITs) are subject to and are required to pay the minimum franchise tax. Regulated investment companies (RICs) and real estate investment trusts (REITs) organized as corporations are also subject to and are required to pay the minimum franchise tax. RICs, REITs, REMICs, and FASITs are entities authorized by the federal government for special tax treatment. California conforms in large part to federal tax provisions but subjects each entity to payment of the annual minimum tax.
Provides that LLCs and certain small corporations, solely owned by a deployed member of the United States (U.S.) Armed Forces, are exempted until January 1, 2018 from the $800 annual tax and minimum franchise tax
FISCAL EFFECT: The FTB estimates that this bill would reduce the General Fund by $4 million in the fiscal year (FY) 2015-16, $9.8 million in FY 2016-17, and $13 million in FY 2017-18.
COMMENTS:
Author’s Statement: The author has provided the following statement in support of this bill:
California is consistently ranked as one of the worst states in which to do business. Since 2012, the Tax Foundation has ranked California as one of the worst states for taxes, and publications such as Chief Executive Magazine have named California the most unfriendly state towards business for the past four years running, citing the state’s high taxes and burdensome regulations on business as the main factor for this ranking. Forbes magazine cites the cost of doing business in California as 10.2% higher than the average cost of doing business in other states. California's current regulatory and tax environment is not friendly to small business growth, which is an important factor in job creation.
”Current tax policy requires businesses in California to pay a minimum franchise tax of $800 even if they operate at a loss for the fiscal year. By penalizing businesses $800 annually simply for existing, the state discourages business investment and can make it difficult for newly formed small businesses to be able to afford to do business as they establish themselves in the market. Reducing the minimum franchise tax to $400 for the first year of operation for small partnerships, LLCs, and LLPs and for the second year of a corporation’s existence will help to relieve the tax burden placed upon newly formed small businesses, allowing them to retrain more capital up front for growth, as opposed to the prepayment of future tax liability.
"AB 612 will reduce the tax burden imposed upon newly formed businesses in California during their critical start-up years and is an important step in making California more business-friendly.Arguments in Support: The National Federation of Independent Business (NFIB) states, “[o]ne significant hurdle and inhibitor for many entrepreneurs is the California minimum franchise tax of $800 per year. Many individuals consider this a game-ender, as they do not have the resources to pay that amount to get their business going.” NFIB continues on to say, “[s]mall business owners are willing to comply with and pay the right taxes, abide by the right regulations and requirements and permits, but these entrepreneurs first need to know they have support and opportunity to open their doors. AB 612 helps to show a good-faith effort by the State that there is support of a growing and thriving ‘Main Street’ and the opportunity to put more people to work. It is fair, sounds policy that is a win-win for out state economy and those wishing to pursue their entrepreneurial dreams.”
Committee Staff Comments:
Minimum Tax: The MFT, the AT, and annual fee were enacted to ensure that all corporations and LLCs pay at least a minimum amount of tax for the privilege of doing business in California, regardless of the businesses income or loss. The minimum tax is not a tax on income. Rather, it is a tax on the right for a corporation doing business in California to exercise the powers granted to them. Irrespective of whether a business generates taxable income, it continues to receive the benefits of its corporate status, namely limited liability protection. Requiring corporations to pay the MFT or AT, regardless if the entity generates taxable income, is not a penalty but rather a payment made in exchange for the benefit of limited liability and the right to exercise corporate powers. If paying either the MFT or the AT is overly burdensome, there is always the alternative of establishing a sole proprietorship or general partnership. However, whereas both entities are not liable for either tax, they are also ineligible to receive the benefits of limited liability.
Small Businesses in California. According to the U.S. Small Business Administration 2014 report, in 2012 California’s small businesses employed 6.5 million of the state’s private workforce. In 2012, small businesses in California created 271,515 net new jobs. Additionally, California’s private-sector employment growth increased by 2.6% by the end of October 2014, whereas the national average was 2.3%. In 2010, 59,314 businesses opened in California. Of those businesses, 67.7% remained in business through 2012. In 2013, 109,395 opened in California. Of those businesses, 79.4% remained in business through 2014. According to the U.S. Department of Labor, 62,938 new businesses opened in the first quarter of 2014, whereas 58,205 closed in California. However, businesses filing bankruptcies have declined during the periods from 2010 to 2014, implying a healthier state economy. (U.S. Small Business Administration, Office of Advocacy. California Small Business Profile. 2015.)
Is the MFT or AT the Problem? According to Forbes.com, the top five reasons why small business fail is because business owners: (a) did not know what their customers wanted/thought, (b) lacked a unique proposition, (c) failed to communicate that propositions appropriately, (d) lacked leadership ability/management skills, and (e) lacked a sufficient/proven business model. (Eric T. Wagner. Five Reasons 8 out of 10 Businesses Fail. Forbes. 2015.) Whereas state taxes and regulations may make it more difficult for a new business owner to enter into the market, generally they are not a major cause for business failure. Additionally, according to an article published by the Consumer News and Business Channel (CNBC), the 11 most common reasons why small businesses fail are: (a) lack of funding, (b) overconfidence, (c) poor pricing strategy, (d) dueling partners, (e) burnout, (f) stale marketing message, (g) failure to join the digital revolution, (h) cybertheft, (i) underestimating the competition, (j) overreliance on one customer, and (k) disgruntled employees. (Peter Dazeley. 11 Common Reasons Small Businesses Fail. CNBC. 2015.) Therefore, it would behoove the state to focus on these concerns if it wants to encourage new businesses and their success.
Supply-Side Economics: Generally, advocates for tax incentives, such as Arthur Laffer and N. Gregory Mankiw, argue that reduced taxes allow taxpayers to invest money that would otherwise be paid in taxes, thereby creating additional economic activity. “Supply-siders” posit that higher taxes do not result in more government revenue; instead, they suppress additional innovation and investment that would have led to more economic activity and, therefore, healthier public treasuries, under lower marginal tax rates. Critics, however, assert that tax incentives rarely result in additional economic activity. Companies conduct business in California because of its competitive advantages, namely its environment; transportation infrastructure; access to ports, highways, and railroads; as well as its highly skilled workforce and world-class higher education system. $800 is a nominal amount in light of the benefits that are conferred.
LLCs: For most of American history, business owners had a choice of either a partnership or a corporation. Relatively recently, however, the LLC business structure has become one of the most popular choices for starting a new business because it provides owners with the limited liability of "C" corporations and the flow through tax status of partnerships. In 2007, formation of LLCs in the U.S. outpaced the number of corporations by a margin of two-to-one. As a result, the number of new partnerships, although difficult to track, has also substantially decreased. According to Professor Howard Freidman, the general partnership can easily be replaced by an LLC, providing the informal benefits of a partnership along with limited liability. General partnerships that exists today are either those that exist from the pre-LLC days or are informal agreements that by default fall within the Uniform Partnership Act. Professor Howard Freidman went on to say that “[t]he once-elaborately drafted partnership agreement has gone the way of the buggy whip and slide rule. It has been replaced by the LLC operating agreement.” (Rodney D. Chrisman, LLCs are the New King of the Hill, Fordham Journal of Corporate and Financial Law, Vol. 15, Issue 2, 2009.)
In general, LLCs provide limited liability, avoidance of double taxation, flexibility of income distribution, simplicity of formation and procedures, and no restrictions on ownership. For a small business owner who has never considered forming as a "C" corporation, the major benefit of an LLC is the limited liability. Generally, members of the LLC are not liable for the debts, liabilities, or obligations of the firm. (Jonathan Macey, The Limited Liability Company: Lessons for Corporate Law, Washington University Law Review, Vol. 73, Issue 2, 1995.) The goal of providing limited liability appears to be the state’s need to promote investment by transferring risk from investors to creditors. (David Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability, Emory Law Journal, Vol. 65, Number 5, 2007.) Therefore, LLCs and other limited liability structures provide a substantial benefit to entrepreneurs at a nominal cost of $800 per year, even when their businesses are insolvent or operating at a loss.How is a tax expenditure different from a direct expenditure: As the Department of Finance notes in its AT Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, once they are put in place, tax expenditures are reviewed less frequently than direct expenditures. Although this creates greater certainty for taxpayers regarding the applicable tax laws (because the tax expenditure will remain on the books for longer periods of time), it may also result in arbitrary tax expenditures that do not serve a public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that once enacted it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. For this reason, the author may wish to include a five-year sunset date for this deduction, to provide the opportunity for future legislative review.
Prior Legislation:
AB 1889 (Hagman), of the 2013-14 Legislative Session, would have reduced the minimum franchise tax to $400 for a new corporation in the second taxable year, and reduces the annual tax to $400 for new LPs, new LLPs, and new LLCs defined as small businesses in the first taxable year. AB 1889 was held on this Committee's Suspense File.
AB 2086 (Calderon), of the 2013-14 Legislative Session, would have allowed LLCs to pay the annual minimum tax, fee, and estimated tax over time. AB 2086 failed passage in the Assembly Appropriations Committee.
AB 2244 (Chau), of the 2013-14 Legislative Session, would have reduced the minimum franchise tax to $200 for a dormant business entity and to $50 for an inactive business entity. AB 2244 failed passage in the Assembly Appropriations Committee.
AB 2428 (Patterson), of the 2013-14 Legislative Session, would have provided a deduction for income derived from a qualified business, provides an exemption from the minimum franchise tax, and extends the sunset date of the minimum franchise tax for deployed armed forces. AB 2428 was held on this Committee's Suspense File.
AB 2466 (Nestande), of the 2013-14 Legislative Session, would have reduced the minimum tax for new veteran-owned businesses and eliminate the tax if the business operates at a loss or ceases operation. AB 2466 failed passage in the Assembly Appropriations Committee.
AB 2495 (Melendez), of the 2013-14 Legislative Session, would have exempt new qualifying corporations, LPs, LLPs, and LLCs from the annual minimum tax for the first five consecutive taxable years. AB 2495 was held on this Committee's Suspense File.
AB 2671 (Cook), Chapter 394, Statutes of 2010, exempts, until 2010, certain small corporations and LLCs solely owned by a deployed member of the U.S. Armed Forces from the annual minimum franchise tax.
AB 327 (Garrick), of the 2009-10 Legislative Session, would have reduced the minimum franchise tax from $800 to $100. AB 237 was held on this Committee's Suspense File.
AB 2178 (Garrick), of the 2007-08 Legislative Session, would have reduced the minimum franchise tax from $800 to $200. AB 2178 was held on this Committee's Suspense File.
AB 1179 (Garrick), of the 2007-08 Legislative Session, is similar to AB 327. AB 1179 was held on this Committee's Suspense File.
AB 1419 (Campbell), of the 1997-98 Legislative Session, would have reduced the minimum franchise tax for a qualified corporation from $800 to $100. AB 1419 failed passage in the Senate Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
Fresno Chamber of Commerce
National Federation of Independent Business
State Board of Equalization, 4th District, Board Member
State Board of Equalization, 1st District, Vice Chair
Opposition
None on file
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098, Paul Kim / REV. & TAX. / (916) 319-2098
1 According to the Franchise Tax Board (FTB), for taxable years beginning on or after January 1, 1997, only taxpayers with net incomes of less than approximately $9,040 pay the minimum franchise tax because the amount of measured tax owed would be less than $800 ($9,039 x 8.84% = $799).
AB 612
Page 7
Date of Hearing: May 4, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 612
(Patterson) – As Amended March 12, 2015
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Minimum franchise tax: annual tax: small business
SUMMARY: Reduces the minimum franchise tax to $400 in the second taxable year for a new corporation, and reduces the annual tax in the first taxable year for a new limited partnership (LP), new limited liability partnership (LLP), and new limited liability company (LLC) that is a small business. Specifically, this bill:
Provides, beginning on or after January 1, 2016, that every new LP, LLC, and LLP defined as a small business shall pay an annual tax of $400 for its first taxable year.
Provides, beginning on or after January 1, 2016, that every new corporation defined as a small business shall pay a minimum franchise tax of $400 for its second taxable year.
Defines a "small business" as an LP or LLP that has gross receipts, less returns and allowances, reportable to this state for the taxable year of $5,000 or less.
Defines a "small business" as a corporation or an LLC that reasonably estimates that it will have gross receipts, less returns and allowances, reportable to this state for the taxable year of $5,000 or less.
Defines "gross receipts, less returns and allowances reportable to this state" as, the sum of the gross receipts from the production of business income, and the gross receipts from the production of nonbusiness income.
Defines a "new LP" as, an LP that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. A “new LP” does not include any LP that began business operations as, or acquired its business operations from, a sole proprietorship, a LLP, or any other form of business entity prior to its organization. This reduction in the annual tax shall not apply to any LP that reorganizes solely for the purpose of reducing its annual tax.
Defines a “new LLC” as, an LLC that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. A “new LLC” does not include any limited liability company that began business operations as, or acquired its business operations from, a sole proprietorship, a limited liability company or any other form of business entity prior to its organization. This reduction in the annual tax shall not apply to any LLC that reorganizes solely for the purpose of reducing its annual tax.
Defines a “new LLP” as, an LLP that on or after January 1, 2016, is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its organization. A “new LLP” does not include any limited liability partnership that began business operations as, or acquired its business operations from, a sole proprietorship, a limited liability partnership, or any other form of business entity prior to its organization. This reduction in the annual tax shall not apply to any LP that reorganizes solely for the purpose of reducing its annual tax.
Defines a “new corporation” as, a corporation that on or after January 1, 2016, is incorporated under the laws of this state or has qualified to transact intrastate business in this state that begins business operations at or after the time of its incorporation. “New corporation” does not include any corporation that began business operations as, or acquired its business operations from, a sole proprietorship, a corporation or any other form of business entity prior to its incorporation. This reduction in the minimum franchise tax shall not apply to any corporation that reorganizes solely for the purpose of avoiding payment of its minimum franchise tax.
Provides that reduction in the annual and minimum franchise tax shall apply to corporations, LPs, LLCs, or LLPs only if they file a timely return.
Provides that if the LLC or corporation's gross receipts exceed $5,000, an additional tax in the amount equal to $400 shall be paid on the due date of its return for the taxable year, without regard to extension.
Takes effect immediately as a tax levy.
EXISTING LAW:
Imposes franchise tax on all corporations doing business in California equal to 8.84% of the taxable income attributable to California. A minimum franchise tax of $800 is imposed on all corporations that are incorporated under the laws of California, qualified to transact intrastate business in California, or are doing business in California. Taxpayers must pay the minimum franchise tax only if it is more than their regular franchise tax liability.1
Provides exceptions with respect to imposition of the minimum franchise tax. For instance, credit unions and nonprofit organizations are not subject to the minimum franchise tax and a corporation is not subject to the minimum franchise tax for its first taxable year. However, even though a corporation is not subject to the minimum tax in its first taxable year, it will be subject to franchise tax in its first taxable year based on its taxable income.
Provides that LPs, LLPs, and LLCs that are doing business in California, registered or qualified to do business in California, or formed in this state, are subject to annual tax in an amount equal to the minimum franchise tax, currently set at $800. These entities (known as 'pass-through entities') are not subject to any tax based on taxable income. Rather, the items of income, gain, loss, deduction and credit are passed-through to the owners and reported on their respective income or franchise tax returns.
Provides that real estate mortgage investment conduits (REMICs) and financial asset securitization investment trusts (FASITs) are subject to and are required to pay the minimum franchise tax. Regulated investment companies (RICs) and real estate investment trusts (REITs) organized as corporations are also subject to and are required to pay the minimum franchise tax. RICs, REITs, REMICs, and FASITs are entities authorized by the federal government for special tax treatment. California conforms in large part to federal tax provisions but subjects each entity to payment of the annual minimum tax.
Provides that LLCs and certain small corporations, solely owned by a deployed member of the United States (U.S.) Armed Forces, are exempted until January 1, 2018 from the $800 annual tax and minimum franchise tax
FISCAL EFFECT: The FTB estimates that this bill would reduce the General Fund by $4 million in the fiscal year (FY) 2015-16, $9.8 million in FY 2016-17, and $13 million in FY 2017-18.
COMMENTS:
Author’s Statement: The author has provided the following statement in support of this bill:
California is consistently ranked as one of the worst states in which to do business. Since 2012, the Tax Foundation has ranked California as one of the worst states for taxes, and publications such as Chief Executive Magazine have named California the most unfriendly state towards business for the past four years running, citing the state’s high taxes and burdensome regulations on business as the main factor for this ranking. Forbes magazine cites the cost of doing business in California as 10.2% higher than the average cost of doing business in other states. California's current regulatory and tax environment is not friendly to small business growth, which is an important factor in job creation.
”Current tax policy requires businesses in California to pay a minimum franchise tax of $800 even if they operate at a loss for the fiscal year. By penalizing businesses $800 annually simply for existing, the state discourages business investment and can make it difficult for newly formed small businesses to be able to afford to do business as they establish themselves in the market. Reducing the minimum franchise tax to $400 for the first year of operation for small partnerships, LLCs, and LLPs and for the second year of a corporation’s existence will help to relieve the tax burden placed upon newly formed small businesses, allowing them to retrain more capital up front for growth, as opposed to the prepayment of future tax liability.
"AB 612 will reduce the tax burden imposed upon newly formed businesses in California during their critical start-up years and is an important step in making California more business-friendly.Arguments in Support: The National Federation of Independent Business (NFIB) states, “[o]ne significant hurdle and inhibitor for many entrepreneurs is the California minimum franchise tax of $800 per year. Many individuals consider this a game-ender, as they do not have the resources to pay that amount to get their business going.” NFIB continues on to say, “[s]mall business owners are willing to comply with and pay the right taxes, abide by the right regulations and requirements and permits, but these entrepreneurs first need to know they have support and opportunity to open their doors. AB 612 helps to show a good-faith effort by the State that there is support of a growing and thriving ‘Main Street’ and the opportunity to put more people to work. It is fair, sounds policy that is a win-win for out state economy and those wishing to pursue their entrepreneurial dreams.”
Committee Staff Comments:
Minimum Tax: The MFT, the AT, and annual fee were enacted to ensure that all corporations and LLCs pay at least a minimum amount of tax for the privilege of doing business in California, regardless of the businesses income or loss. The minimum tax is not a tax on income. Rather, it is a tax on the right for a corporation doing business in California to exercise the powers granted to them. Irrespective of whether a business generates taxable income, it continues to receive the benefits of its corporate status, namely limited liability protection. Requiring corporations to pay the MFT or AT, regardless if the entity generates taxable income, is not a penalty but rather a payment made in exchange for the benefit of limited liability and the right to exercise corporate powers. If paying either the MFT or the AT is overly burdensome, there is always the alternative of establishing a sole proprietorship or general partnership. However, whereas both entities are not liable for either tax, they are also ineligible to receive the benefits of limited liability.
Small Businesses in California. According to the U.S. Small Business Administration 2014 report, in 2012 California’s small businesses employed 6.5 million of the state’s private workforce. In 2012, small businesses in California created 271,515 net new jobs. Additionally, California’s private-sector employment growth increased by 2.6% by the end of October 2014, whereas the national average was 2.3%. In 2010, 59,314 businesses opened in California. Of those businesses, 67.7% remained in business through 2012. In 2013, 109,395 opened in California. Of those businesses, 79.4% remained in business through 2014. According to the U.S. Department of Labor, 62,938 new businesses opened in the first quarter of 2014, whereas 58,205 closed in California. However, businesses filing bankruptcies have declined during the periods from 2010 to 2014, implying a healthier state economy. (U.S. Small Business Administration, Office of Advocacy. California Small Business Profile. 2015.)
Is the MFT or AT the Problem? According to Forbes.com, the top five reasons why small business fail is because business owners: (a) did not know what their customers wanted/thought, (b) lacked a unique proposition, (c) failed to communicate that propositions appropriately, (d) lacked leadership ability/management skills, and (e) lacked a sufficient/proven business model. (Eric T. Wagner. Five Reasons 8 out of 10 Businesses Fail. Forbes. 2015.) Whereas state taxes and regulations may make it more difficult for a new business owner to enter into the market, generally they are not a major cause for business failure. Additionally, according to an article published by the Consumer News and Business Channel (CNBC), the 11 most common reasons why small businesses fail are: (a) lack of funding, (b) overconfidence, (c) poor pricing strategy, (d) dueling partners, (e) burnout, (f) stale marketing message, (g) failure to join the digital revolution, (h) cybertheft, (i) underestimating the competition, (j) overreliance on one customer, and (k) disgruntled employees. (Peter Dazeley. 11 Common Reasons Small Businesses Fail. CNBC. 2015.) Therefore, it would behoove the state to focus on these concerns if it wants to encourage new businesses and their success.
Supply-Side Economics: Generally, advocates for tax incentives, such as Arthur Laffer and N. Gregory Mankiw, argue that reduced taxes allow taxpayers to invest money that would otherwise be paid in taxes, thereby creating additional economic activity. “Supply-siders” posit that higher taxes do not result in more government revenue; instead, they suppress additional innovation and investment that would have led to more economic activity and, therefore, healthier public treasuries, under lower marginal tax rates. Critics, however, assert that tax incentives rarely result in additional economic activity. Companies conduct business in California because of its competitive advantages, namely its environment; transportation infrastructure; access to ports, highways, and railroads; as well as its highly skilled workforce and world-class higher education system. $800 is a nominal amount in light of the benefits that are conferred.
LLCs: For most of American history, business owners had a choice of either a partnership or a corporation. Relatively recently, however, the LLC business structure has become one of the most popular choices for starting a new business because it provides owners with the limited liability of "C" corporations and the flow through tax status of partnerships. In 2007, formation of LLCs in the U.S. outpaced the number of corporations by a margin of two-to-one. As a result, the number of new partnerships, although difficult to track, has also substantially decreased. According to Professor Howard Freidman, the general partnership can easily be replaced by an LLC, providing the informal benefits of a partnership along with limited liability. General partnerships that exists today are either those that exist from the pre-LLC days or are informal agreements that by default fall within the Uniform Partnership Act. Professor Howard Freidman went on to say that “[t]he once-elaborately drafted partnership agreement has gone the way of the buggy whip and slide rule. It has been replaced by the LLC operating agreement.” (Rodney D. Chrisman, LLCs are the New King of the Hill, Fordham Journal of Corporate and Financial Law, Vol. 15, Issue 2, 2009.)
In general, LLCs provide limited liability, avoidance of double taxation, flexibility of income distribution, simplicity of formation and procedures, and no restrictions on ownership. For a small business owner who has never considered forming as a "C" corporation, the major benefit of an LLC is the limited liability. Generally, members of the LLC are not liable for the debts, liabilities, or obligations of the firm. (Jonathan Macey, The Limited Liability Company: Lessons for Corporate Law, Washington University Law Review, Vol. 73, Issue 2, 1995.) The goal of providing limited liability appears to be the state’s need to promote investment by transferring risk from investors to creditors. (David Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability, Emory Law Journal, Vol. 65, Number 5, 2007.) Therefore, LLCs and other limited liability structures provide a substantial benefit to entrepreneurs at a nominal cost of $800 per year, even when their businesses are insolvent or operating at a loss.How is a tax expenditure different from a direct expenditure: As the Department of Finance notes in its AT Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, once they are put in place, tax expenditures are reviewed less frequently than direct expenditures. Although this creates greater certainty for taxpayers regarding the applicable tax laws (because the tax expenditure will remain on the books for longer periods of time), it may also result in arbitrary tax expenditures that do not serve a public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that once enacted it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. For this reason, the author may wish to include a five-year sunset date for this deduction, to provide the opportunity for future legislative review.
Prior Legislation:
AB 1889 (Hagman), of the 2013-14 Legislative Session, would have reduced the minimum franchise tax to $400 for a new corporation in the second taxable year, and reduces the annual tax to $400 for new LPs, new LLPs, and new LLCs defined as small businesses in the first taxable year. AB 1889 was held on this Committee's Suspense File.
AB 2086 (Calderon), of the 2013-14 Legislative Session, would have allowed LLCs to pay the annual minimum tax, fee, and estimated tax over time. AB 2086 failed passage in the Assembly Appropriations Committee.
AB 2244 (Chau), of the 2013-14 Legislative Session, would have reduced the minimum franchise tax to $200 for a dormant business entity and to $50 for an inactive business entity. AB 2244 failed passage in the Assembly Appropriations Committee.
AB 2428 (Patterson), of the 2013-14 Legislative Session, would have provided a deduction for income derived from a qualified business, provides an exemption from the minimum franchise tax, and extends the sunset date of the minimum franchise tax for deployed armed forces. AB 2428 was held on this Committee's Suspense File.
AB 2466 (Nestande), of the 2013-14 Legislative Session, would have reduced the minimum tax for new veteran-owned businesses and eliminate the tax if the business operates at a loss or ceases operation. AB 2466 failed passage in the Assembly Appropriations Committee.
AB 2495 (Melendez), of the 2013-14 Legislative Session, would have exempt new qualifying corporations, LPs, LLPs, and LLCs from the annual minimum tax for the first five consecutive taxable years. AB 2495 was held on this Committee's Suspense File.
AB 2671 (Cook), Chapter 394, Statutes of 2010, exempts, until 2010, certain small corporations and LLCs solely owned by a deployed member of the U.S. Armed Forces from the annual minimum franchise tax.
AB 327 (Garrick), of the 2009-10 Legislative Session, would have reduced the minimum franchise tax from $800 to $100. AB 237 was held on this Committee's Suspense File.
AB 2178 (Garrick), of the 2007-08 Legislative Session, would have reduced the minimum franchise tax from $800 to $200. AB 2178 was held on this Committee's Suspense File.
AB 1179 (Garrick), of the 2007-08 Legislative Session, is similar to AB 327. AB 1179 was held on this Committee's Suspense File.
AB 1419 (Campbell), of the 1997-98 Legislative Session, would have reduced the minimum franchise tax for a qualified corporation from $800 to $100. AB 1419 failed passage in the Senate Revenue and Taxation Committee
REGISTERED SUPPORT / OPPOSITION:
Support
Fresno Chamber of Commerce
National Federation of Independent Business
State Board of Equalization, 4th District, Board Member
State Board of Equalization, 1st District, Vice Chair
Opposition
None on file
Analysis Prepared by: Paul Kim / REV. & TAX. / (916) 319-2098
1 According to the Franchise Tax Board (FTB), for taxable years beginning on or after January 1, 1997, only taxpayers with net incomes of less than approximately $9,040 pay the minimum franchise tax because the amount of measured tax owed would be less than $800 ($9,039 x 8.84% = $799).
Discussed in Hearing
7MIN
Assembly Standing Committee on Revenue and Taxation
Bill Author
Bill Co-Author(s):