Existing law imposes a minimum franchise tax of $800, except as provided, on every corporation incorporated in this state, qualified to transact intrastate business in this state, or doing business in this state. state, and a minimum annual tax on every limited partnership, limited liability partnership, and limited liability company registered, qualified to transact business, or doing business in this state, as specified. 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.

This bill would, for taxable years beginning on or after January 1, 2019, exempt a corporation that is a new corporation limited partnership that is a new limited partnership and a limited liability company that is a new limited liability company in taxable years beginning on or after January 1, 2019, and is a small business in its first and 2nd taxable year from payment of the minimum franchise annual tax for its first and 2nd taxable years. taxable year.

This bill would take effect immediately as a tax levy.

Existing law imposes an annual tax in an amount equal to the minimum franchise tax on every limited liability company doing business in this state. In addition, existing law requires 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, to pay an annual tax in an amount equal to the minimum franchise tax. Existing law requires the tax assessed under these provisions to be due and payable on or before the 15th day of the 4th month of the taxable year. a minimum franchise tax of $800, 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 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 requires corporations subject to the minimum franchise tax to pay annually to the state a minimum franchise tax of $800 and provides that the estimated tax shall not be less than the minimum tax. If the amount of estimated tax does not exceed the minimum franchise tax, existing law requires the entire amount of the estimated tax to be due and payable on or before the 15th day of the 4th month of the taxable year.

This bill would also authorize that annual tax and minimum franchise tax to be due and payable in 2 or 3 equal installments, on or before specified dates. would, for taxable years beginning on or after January 1, 2019, exempt a corporation that is a new corporation in taxable years beginning on or after January 1, 2019, and is a small business in its first and 2nd taxable year from payment of the minimum franchise tax for its first and 2nd taxable years.

Existing law imposes an annual tax in an amount equal to the minimum franchise tax on every limited liability company doing business in this state. In addition, existing law requires 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, to pay an annual tax in an amount equal to the minimum franchise tax. Existing law requires the tax assessed under these provisions to be due and payable on or before the 15th day of the 4th month of the taxable year.

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 requires corporations subject to the minimum franchise tax to pay annually to the state a minimum franchise tax of $800 and provides that the estimated tax shall not be less than the minimum tax. If the amount of estimated tax does not exceed the minimum franchise tax, existing law requires the entire amount of the estimated tax to be due and payable on or before the 15th day of the 4th month of the taxable year.

This bill would also authorize that annual tax and minimum franchise tax to be due and payable in 2 or 3 equal installments, on or before specified dates.

Existing law imposes an annual tax in an amount equal to the minimum franchise tax on every limited liability company doing business in this state. In addition, existing law requires 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, to pay an annual tax in an amount equal to the minimum franchise tax. Existing law requires the tax assessed under these provisions to be due and payable on or before the 15th day of the 4th month of the taxable year.

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 requires corporations subject to the minimum franchise tax to pay annually to the state a minimum franchise tax of $800 and provides that the estimated tax shall not be less than the minimum tax. If the amount of estimated tax does not exceed the minimum franchise tax, existing law requires the entire amount of the estimated tax to be due and payable on or before the 15th day of the 4th month of the taxable year.

This bill would also authorize that annual tax and minimum franchise tax to be due and payable in 2 or 3 equal installments, on or before specified dates.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 1085 (Calderon) - Minimum annual tax: exemption

This bill meets the criteria for referral to the Suspense File.

Bill Summary: AB 1085 would create a first-year exemption from the minimum annual tax for small businesses that are classified as either Limited Liability Companies (LLCs) or Limited Partnerships (LPs).

Fiscal Impact: The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $18 million in 2018-19, $31 million in 2019-20, and $32 million in 2020-21. FTB’s costs to implement the bill would be minor and absorbable.

Background: Corporations in the State generally must pay either the minimum franchise tax (MFT) of $800, or the measured franchise tax of 8.84 percent of apportioned net income if that amount is in excess of $800 (except during their first year of operation). Beginning in taxable year 1997, only taxpayers with net income less than approximately $9,050 pay the MFT because the amount of measured tax owed would be less than $800 ($9,049 multiplied by 8.84 percent equals $799). Under current law, every corporation that incorporates or qualifies to do business in the State on or after January 1, 2000, is exempt from the MFT for its first taxable year. This exemption does not apply to any corporation that reorganizes solely for the purposes of avoiding payment of its MFT.

Additionally, current law imposes an annual tax on LLCs not classified as associations, LPs, and Limited Liability Partnerships (LLPs) that are either organized or doing business in California. The annual tax is currently set at $800 by reference to the MFT. These entities (known as 'pass-through entities') are not subject to any tax based on taxable income. Rather, the entity’s items of income, gain, loss, deduction, and credit are passed-through to the owners and reported on their respective income or franchise tax returns. Unlike corporations which are granted a first-year exemption from the MFT, LLCs, LPs, and LLPs are not granted a similar exemption from the annual tax.

The MFT was enacted to ensure that all corporations, LPs, LLPs, and limited liability corporations LLCs pay at least a minimum amount of tax for the privilege of conducting business in California, regardless of the business’s income or losses. Thus, the tax is not an income tax; instead, is a tax on the right to exercise the powers granted to a corporation conducting business in California. Even when a business earns no income, it still receives the benefits of its corporate status, including the limited liability protection.

Proposed Law: This bill would create a one-year exemption from the annual tax for small businesses in the first year of their formation. Small businesses are defined as LLCs or LPs with gross receipts of $50,000 or less. The business must also be formed on or after January 1st, 2019 to qualify for this exemption, and would not apply to (1) LLCs and LPs that reorganize solely for the purpose of reducing its annual tax and, (2) those that file untimely tax returns.

Related Legislation:

• SB 1417 (Canella) would have exempted certain small business LLCs from the MFT for up to two taxable years. The bill was held under submission on the Suspense File of this Committee.
• AB 2131 (Melendez) would reduce the MFT from $800 to $400. The bill was held under submission on the Suspense File of the Assembly Appropriations Committee.
• AB 2410 (Grayson) would reduce the annual tax for LLCs that are a small business, as defined, within the first two years of operation from $800 to $400. The bill was held under submission on the Suspense File of the Assembly Appropriations Committee.
• AB 2625 (Lopez, 2016) would have reduced the minimum franchise and annual tax on certain new microbusiness entities. The bill failed to pass out of the Assembly by the constitutional deadline.

Staff Comments: California's minimum tax was increased from $100 to $200 in 1972. It was increased to $300 in 1987, to $600 in 1989, and to $800 in 1990. Inflation (as measured by the Gross Domestic Product Implicit Price Deflator for State and Local Purchases) has risen 670 percent since 1972, when the MFT was increased for the first time, to $200. Had the MFT been adjusted for inflation since 1972, it would have been $1,336 in 2017.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Minimum franchise tax: exemption

Creates a first year exemption from the minimum annual tax for small businesses that are classified as either Limited Liability Companies or Limited Partnerships.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives to compensate taxpayers for incurring certain expenses, such as child adoption, and/or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that but for the tax credit, they would otherwise not do. The Department of Finance is required to annually publish a list of tax expenditures, currently totaling around $61 billion per year.

Minimum Franchise Tax. State law imposes a franchise tax on all corporations doing business in California equal to 8.84% of the corporation’s taxable income attributable to California. State law also imposes a Minimum Franchise Tax (MFT) of $800 on all corporations that are either organized or doing business in California. Taxpayers must pay either the regular franchise tax or the MFT, whichever is greater. For taxable years beginning on or after January 1, 1997,

corporations that have net income of less than $9,050 pay the MFT since their measured franchise tax would be less than $800 as shown below:

$9,050 Corporation’s Net Income x 8.84% State Tax Rate = $800.02

Every corporation that incorporates or qualifies to do business in this state on or after

January 1, 2000, is exempt from the MFT for its first taxable year. This exemption does not apply to any corporation that reorganizes solely for the purposes of avoiding payment of its MFT.

Annual Tax. State law imposes an annual tax on Limited Liability Companies (LLCs) not classified as associations, Limited Partnerships (LPs), and Limited Liability Partnerships (LLPs) that are either organized or doing business in California. The annual tax is currently set at $800 by reference to the minimum franchise tax. These entities (known as 'pass-through entities') are not subject to any tax based on taxable income. Rather, the entity’s items of income, gain, loss, deduction, and credit are passed-through to the owners and reported on their respective income or franchise tax returns.

Unlike corporations which are granted a first year exemption from the MFT, LLCs, LPs, and LLPs are not granted a similar exemption from the annual tax. The author would like to offer small businesses an exemption from the annual tax in their first year of formation.

Proposed Law

Assembly Bill 1085 creates a one year exemption from the annual tax for small businesses in the first year of their formation. Small businesses are defined as LLCs or LPs with gross receipts of $50,000 or less. The business must also be formed on or after January 1^st, 2019 to qualify for this exemption. AB 1085 does not apply to LLCs and LPs that reorganize solely for the purpose of reducing its annual tax and that file untimely tax returns.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “AB 1085 seeks to help new businesses succeed in California, by exempting new, small businesses from having to pay the minimum franchise tax in their first year of operation. California consistently leads the nation in economic vitality and innovative technologies, but the state has one of the highest corporate taxes in the nation.  This distinction threatens our position as a leader in economic opportunity and can have a dampening effecting on our businesses’ ability to create jobs. California has the opportunity to spur economic growth and create jobs for its residents by alleviating the cost restraints new businesses face during their first operating year.  AB 1085 will encourage our citizens to explore their entrepreneurial capabilities.”

2. The rationale. The MFT and the annual tax are essentially taxes for the privilege of doing business in California. Regardless of whether a corporation, LLC, LP, or LLP generates income, the entity accrues benefits from the state. For example, one of the benefits entities receive is the limitations on the personal liability of all or some of the entity’s officers. In other words, if the business fails, the entity can discharge its debts and its officers can avoid personal bankruptcy. In return for these benefits, the state imposes the MFT or annual tax of $800. Additionally, the formation of a new business entity imposes administrative costs on the state. Whether or not the annual tax is applied, the state will still incur the same administrative costs to form the new entity. If no annual tax is imposed on newly formed LLCs and LPs, the state will have to reduce spending on vital public services such as education and public safety, or increase taxes to fund the additional cost incurred. The Committee may wish to consider weather AB 1085 is worth the spending cuts and/or tax increases.

3. Equality. Currently corporations incorporated on or after January 1^st, 2000, are exempt from the MFT in their first year but, LPs, LLCs, and LLPs are not extended the same treatment. Providing a tax benefit to corporations and not to LPs, LLCs, and LLPs means the state is essentially treating taxpayers differently based on their business entity’s classification. AB 1085 attempts to correct this inequity by extending a similar tax benefit to LLCs and LLPs. However, LLPs are not included in AB 1085’s exemption, which allows the differential treatment of LLPs to continue. The Committee may wish to consider amending AB 1085 to include LLPs in the first year annual tax exemption.

4. Gut and amend. When approved by the Assembly, AB 1085 previously related to payment plans for Corporations and LLCs treated as corporations to pay their MFT in two or three equal installments. On July 2^nd, the author deleted those provisions, and inserted provisions to create an annual tax exemption for newly formed LLCs and LPs that were classified as small businesses.

Assembly Actions

Prior vote not relevant to the August 6^th version of the bill.

Support and Opposition

(8/6/18)

Support: Unknown.

Opposition: Unknown.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Business entities: annual tax: minimum franchise tax: fees

Allows corporations and limited liability companies (LLCs) the option to pay their minimum franchise tax (MFT) or annual tax in 2 or 3 equal installments.

Background

California 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 (MFT) 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 MFT only if it is more than their regular franchise tax liability. For taxable years beginning on or after January 1, 1997, only corporate taxpayers whose net income is less than approximately $9,040 pay the MFT because their measured tax would be less than $800 ($9,039 x 8.84% = $799). Every corporation that incorporates or qualifies to do business in this state on or after January 1, 2000, is exempt from the MFT for its first taxable year.

Limited Liability Companies (LLCs) not classified as associations, Limited partnerships (LPs) and limited liability partnerships (LLPs) that are doing business in California, registered or qualified to do business in California, or formed in this state, are subject to an “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. All LLCs do, however, pay an annual fee based on their gross receipts derived from or attributable to California.

Both the MFT and the annual tax are due and payable on or before the 15th day of the fourth month of the taxable year. The author wants to offer businesses the option of paying these tax liabilities in installments to better manage their cash flows.

Proposed Law

Assembly Bill 1085 allows corporations and LLCs two new payment options for their MFT and annual tax liabilities:

• In three equal installments due on or before the 15th day of the 4th, 8th, and 12th months of the taxable year, or
• In two equal installments, with the first installment due on or before the 15th day of the fourth month of the taxable year and the second installment due on or before the 15th day of the 12th month of the taxable year.

The Franchise Tax Board (FTB) would be required to develop procedures for taxpayers choosing one of the new installment payment options.to make an annual binding election, by the 15th day of the second month of the taxable year.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “From technological innovations to its vibrant entertainment industry, California has long been heralded as a role model for the rest of the nation. However, the effects of the most recent recession are still being felt throughout the State. AB 1085 seeks to help struggling businesses succeed in California by offering payment options for the minimum franchise tax. This bill intends to create and retain existing jobs in the State to further decrease California’s unemployment rate. Currently, California’s unemployment rate stands at 5.1%, which when compared with the national average of 4.7%, only illustrates that there are still things California can do to continue the reduction in unemployment. In order to further reduce California’s unemployment rate and create jobs for its citizens, the State must provide long term solutions and incentives to businesses that wish to operate in California. With one of the highest corporate taxes in the nation, California’s position as a leader in economic opportunity and job creation is threatened. By addressing the effects of high tax rates on companies, California can move in the right direction to spur economic growth and create jobs for its citizens.”

2. Rationale for the MFT and annual tax. The MFT and the annual tax essentially are taxes for the privilege of doing business in this state. Neither tax is a tax on income. Regardless of whether a corporation, LLC, LP, or LLP generates income, the entity accrues the benefit of limitations on the personal liability of its officers. If the business entity fails, it can discharge its debts and its officers can avoid personal bankruptcy. Moreover, the formation of a new business entity imposes administrative costs on the state. In return for these benefits, the state imposes the MFT or annual tax of $800.

3. Do cash flow benefits to business justify state costs? AB 1085 gives taxpayers two new installment payment options for their MFT and annual tax liabilities. Under current law, if corporation or LLC does not pay its MFT or annual tax on time, it is subject to the “underpayment of estimated tax” penalty of only $25. Thus, a corporation or LLC that pays its MFT or annual tax with its tax return for that year (typically in April of the following year) would pay only this de minimus penalty. The Committee may wish to consider whether the additional payment flexibility offered by this bill is necessary or justifies the administrative burden and expense it would impose on FTB.

Additionally, FTB notes that this bill would provide a tax benefit to corporations and LLCs that would not be provided to other business types such as LPs and LLPs, thereby treating similarly situated taxpayers differently based on the business entity’s classification.

Assembly Actions

Assembly Revenue and Taxation 10-0

Assembly Appropriations 16-0

Assembly Floor 77-0

Support and Opposition

(6/14/17)

Support: California Chamber of Commerce.

Opposition: Unknown.

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ASSEMBLY THIRD READING

ATR Bill Id:

Author:(Calderon)

As Introduced Ver:

Majority vote

SUMMARY: Provides limited liability companies (LLCs) with various installment payment options for paying the annual tax, and provides corporations with similar installment payment options for paying the estimated minimum franchise tax. Specifically, this bill:

1. Provides the following payment options to LLCs and corporations:
   1. On or before the 15th day of the fourth month of the taxable year;
   2. In two equal installments, with the first installment on or before the 15th day of the fourth month of the taxable year and the second installment on or before the 15th day of the 12 month of the taxable year; or,
   3. In three equal installments on or before the 15th day of the 4th, 8th, and 12th months of the taxable year.
2. Requires the Franchise Tax Board (FTB) to develop procedures for taxpayers to make an annual binding election, by the 15th day of the second month of the taxable year, with the FTB to elect the alternate payment option selected.

EXISTING LAW:

1. Imposes a 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.^[1] Taxpayers must pay the minimum franchise tax only if it is more than their regular franchise tax liability.
2. 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.
3. Provides that limited partnerships, limited liability partnerships, 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.
4. 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: According to the Assembly Appropriations Committee, moderate administrative costs to FTB in excess of $150,000.

COMMENTS:

1. The author has provided the following statement in support of this bill:

California has long been heralded as a role model for the rest of the nation. From technological innovation to its vibrant entertainment industry, California leads the way in diverse economic opportunities and job creation. However, the effects of the most recent recession are still being felt throughout the State. While California's unemployment rate of 5.1% as of January 2017 has decreased over the past few years, it is still higher than the national unemployment rate of 4.7%.

In order to further reduce California's unemployment rate and create jobs for its citizens, the State must provide long term solutions and incentives to businesses that wish to operate in California. With one of the highest corporate taxes in the nation, California's position as a leader in economic opportunity and job creation is threatened. By addressing the effects of high tax rates on companies, California can move in the right direction to spur economic growth and create jobs for its citizens.

1. Committee Staff Comments:
   1. Minimum Tax: The minimum franchise tax, the annual tax, 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 this state, regardless of the businesses income or loss. Thus, the minimum tax is not an "income tax", but rather it is a tax on the right to exercise the powers granted to a corporation doing business in California. Even when a business earns no income, it still receives the benefits of its corporate status, including the limited liability protection under the laws of this state.

The creation of LLCs in particular extended the privileges of corporate power and limited liability without the more complicated tax status and governance requirements of a full corporation. The corporate veil is critical to capital formation in businesses large and small, and provides protection to owners and creditors from liability in tort and insolvency situations. In exchange for protecting business owners and creditors, the state requires these entities to pay an annual minimum franchise tax of $800.

• 1. Cash-Flow Problems: Both startups and established companies may, at some point, face cash-flow problems. A number of things can put a strain on a business' cash flow: customers can choose not to pay or pay late, cost of materials can skyrocket, unforeseen acts can delay production, and changes in interest rates can increase the costs of capital. Additionally, once a business realizes that it is unable to pay current debts, it may be difficult, if not impossible, to secure additional funding. It appears that this bill would provide LLCs and corporations with the ability to pay the tax over time, allowing businesses to use cash on hand to pay other obligations. Regardless of the benefit that may be provided to struggling LLCs and corporations, $800 is a nominal amount, even for a small business. Therefore, it is unclear to Committee staff if a payment plan for an $800 obligation would help struggling businesses succeed.
  2. FTB Staff Comment: According to FTB staff with regard to implementation concerns, this bill “lacks a process for a taxpayer to select a payment option and report that selection in advance of the installment due dates to the FTB. Generally, a taxpayer is required to make a binding election each tax year to provide certainty for both the taxpayer and the department. For example, absent a provision requiring a binding election, taxpayers could select a different payment option during the tax year to avoid penalties or interest. For clarity and ease of administration, this bill should be amended.” Additionally, FTB staff states that despite the language in the bill, a taxpayer making payments under one of the payment options would still be subject to interest and penalties. The amendments taken in the Assembly Committee on Appropriations address the implementation concerns raised by FTB staff.

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0000852

1. According to the FTB, for taxable years beginning on or after January 1, 1997, only a taxpayer with a net income less than approximately $9,040 pays the minimum franchise tax because the amount of measured tax owed would be less than $800 ($9,039 x 8.84% = $799). ↑

Date of Hearing: April 5, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 1085

Author:(Calderon) – As Introduced Ver:February 16, 2017

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill provides limited liability companies (LLCs) with installment plan options for paying the annual tax and provides corporations with similar installment plan options for paying the minimum franchise tax. Specifically, this bill:

1. Allows LLCs and corporations to pay these taxes in two equal installments, as specified, or in three equal installments, as specified. These options are in addition to the current requirement to pay these taxes on or before the 15^th day of the fourth month of the taxable year.
2. Requires the Franchise Tax Board (FTB) to develop procedures for taxpayers to notify the FTB of the payment option selected.
3. Provides that penalties and interest will not be imposed on a taxpayer for electing an alternative payment option.

FISCAL EFFECT:

1. Significant administrative costs to FTB in excess of $150,000. FTB will need to update processes and forms, as required by this bill. FTB will also need to educate taxpayers about different payment options for paying either the annual tax or the minimum franchise tax. Moreover, implementation challenges with AB 1085 impose unnecessary administrative costs on FTB. (See Comment #3).
2. Possible reduction in penalty and interest revenue due to taxpayers electing a different installment plan so as to avoid penalties. (See Comment #3).

COMMENTS:

1. Purpose. According to supporters, AB 1085 will alleviate financial pressures on businesses by giving them flexibility regarding when to make payments of the minimum franchise tax.
2. Background. Existing law imposes a franchise tax on all corporations doing business in California equal to 8.84% of its taxable income. The minimum franchise tax (MFT) is $800, no matter what the taxable income is. Existing law also requires a limited partnership (LP), a limited liability partnership (LLP), or a LLC to pay an annual tax equal to the MFT for the privilege of doing business in California. These entities (known as “pass-through entities”) are not subject to any tax based on taxable income because income is passed through to the owners.

The MFT was enacted to ensure that all corporations, LPs, LLPs, and LLs pay at least a minimum amount of tax for the privilege of conducting business in California, regardless of the business’s income or losses. Thus, the tax is not an income tax but rather it is a tax on the right to exercise the powers granted to a corporation conducting business in California. Even when a business earns no income, it still receives the benefits of its corporate status, including the limited liability protection under this state.

1. Implementation concerns and associated costs. This bill strives to make the process of paying the minimum franchise tax or LLC’s annual tax easier and less cost-prohibitive for LLCs and certain corporations. In doing so, it also creates significant implementation challenges and unnecessary costs for the state.

One consequence of AB 1085 is that a taxpayer who has missed the scheduled payment can now instead elect a different installment plan. Under current law, a taxpayer faces a penalty and interest on a missed payment. While the bill requires FTB to develop procedures for taxpayers to notify in advance the payment option selected, this notification is not binding. Therefore, AB 1085 could both reduce penalty revenue and also create administrative confusion for FTB as the schedule of payments changes without notice.

Moreover, as drafted, AB 1085 allows taxpayers to choose the day in a given month, depending on the plan they choose, to pay their scheduled tax payment. This creates significant uncertainty for FTB, since the universe of days in which these tax payments can be made is substantially expanded. Moreover, FTB must now develop systems that can accommodate this new flexibility.

Addressing this implementation concerns can help reduce administrative costs and help clarify the impact on penalty revenue.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: March 27, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 1085 (

Author:Calderon) – As Introduced Ver:February 16, 2017

Majority vote. Fiscal committee.

SUBJECT: Business entities: annual tax: minimum franchise tax: fees

SUMMARY: Provides limited liability companies (LLCs) with various installment payment options for paying the annual tax, and provides corporations with similar installment payment options for paying the estimated minimum franchise tax. Specifically, this bill:

1. Provides the following payment options to LLCs and corporations:
   1. On or before the 15th day of the fourth month of the taxable year;
   2. In two equal installments, with the first installment on or before the 15th day of the fourth month of the taxable year and the second installment on or before 12 months of that date; or,
   3. In three equal installments on or before the 15th day of the 4th, 8th, and 12th months of the taxable year.
2. Requires the Franchise Tax Board (FTB) to develop procedures for taxpayers to notify the FTB of the payment option selected.
3. Provides that penalties and interest shall not be imposed on a taxpayer for electing an alternative payment option.

EXISTING LAW:

1. Imposes a 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.^[1] Taxpayers must pay the minimum franchise tax only if it is more than their regular franchise tax liability.
2. 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.
3. Provides that limited partnerships, limited liability partnerships, 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.
4. 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 is unable to estimate the impact on General Fund revenues until implementation concerns are resolved.

COMMENTS:

1. The author has provided the following statement in support of this bill:

California has long been heralded as a role model for the rest of the nation. From technological innovation to its vibrant entertainment industry, California leads the way in diverse economic opportunities and job creation. However, the effects of the most recent recession are still being felt throughout the State. While California’s unemployment rate of 5.1% as of January 2017 has decreased over the past few years, it is still higher than the national unemployment rate of 4.7%.

In order to further reduce California’s unemployment rate and create jobs for its citizens, the State must provide long term solutions and incentives to businesses that wish to operate in California. With one of the highest corporate taxes in the nation, California’s position as a leader in economic opportunity and job creation is threatened. By addressing the effects of high tax rates on companies, California can move in the right direction to spur economic growth and create jobs for its citizens.

1. Supporters state that “[w]hile AB 1085 still requires a business to pay the minimum franchise tax, it does provide businesses with flexibility regarding when to make payments of the minimum franchise tax in order to alleviate financial pressures on a business.”
2. Committee Staff Comments:
   1. Minimum Tax: The minimum franchise tax, the annual tax, 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 this state, regardless of the businesses income or loss. Thus, the minimum tax is not an "income tax", but rather it is a tax on the right to exercise the powers granted to a corporation doing business in California. Even when a business earns no income, it still receives the benefits of its corporate status, including the limited liability protection under the laws of this state.

The creation of LLCs in particular extended the privileges of corporate power and limited liability without the more complicated tax status and governance requirements of a full corporation. The corporate veil is critical to capital formation in businesses large and small, and provides protection to owners and creditors from liability in tort and insolvency situations. In exchange for protecting business owners and creditors, the state requires these entities to pay an annual minimum franchise tax of $800.

• 1. Cash-Flow Problems: Both startups and established companies may, at some point, face cash-flow problems. A number of things can put a strain on a business' cash flow: customers can choose not to pay or pay late, cost of materials can skyrocket, unforeseen acts can delay production, and changes in interest rates can increase the costs of capital. Additionally, once a business realizes that it is unable to pay current debts, it may be difficult, if not impossible, to secure additional funding. It appears that this bill would provide LLCs and corporations with the ability to pay the tax over time, allowing businesses to use cash on hand to pay other obligations. Regardless of the benefit that may be provided to struggling LLCs and corporations, $800 is a nominal amount, even for a small business. Therefore, it is unclear to Committee staff if a payment plan for an $800 obligation would help struggling businesses succeed.

1. FTB Staff Comment: According to the FTB with regard to implementation concerns, this bill “lacks a process for a taxpayer to select a payment option and report that selection in advance of the installment due dates to the FTB. Generally, a taxpayer is required to make a binding election each tax year to provide certainty for both the taxpayer and the department. For example, absent a provision requiring a binding election, taxpayers could select a different payment option during the tax year to avoid penalties or interest. For clarity and ease of administration, this bill should be amended.” Additionally, FTB states that despite the language in the bill, a taxpayer making payments under one of the payment options would still be subject to interest and penalties.

REGISTERED SUPPORT / OPPOSITION:

Support

California Chamber of Commerce

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. According to the FTB, for taxable years beginning on or after January 1, 1997, only a taxpayer with a net income less than approximately $9,040 pays the minimum franchise tax because the amount of measured tax owed would be less than $800 ($9,039 x 8.84% = $799). ↑