AB 1256: Minimum franchise tax: annual tax: small business.
- Session Year: 2017-2018
- House: Assembly
- Latest Version Date: 2017-05-16
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, upon appropriation of specified funds by the Legislature, for taxable years beginning on or after January 1, 2018, and before January 1, 2023, would reduce that minimum franchise tax 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 or 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.
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, for taxable years beginning on or after January 1, 2018, would reduce that minimum franchise tax 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.
(a)For each taxable year beginning on or after January 1, 1997, every limited partnership doing business in this state, as defined by Section 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, 2018, and before January 1, 2023, every new limited partnership that is a small business shall pay to the state an annual tax of one hundred dollars ($100) 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, 2018, is first organized under the laws of this state or has first 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.
(5)This subdivision shall become operative on the effective date of any budget measure specifically appropriating funds to the Franchise Tax Board for its costs of administering this subdivision.
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 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, 2018, and before January 1, 2023, every new limited liability company that is a small business shall pay to the state an annual tax of one hundred dollars ($100) 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, 2018, is first organized under the laws of this state or has first 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 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 one hundred dollars ($100) for the taxable year shall be due and payable by the corporation limited liability company 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.
(6)This subdivision shall become operative on the effective date of any budget measure specifically appropriating funds to the Franchise Tax Board for its costs of administering this subdivision.
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, 2018, and before January 1, 2023, a new limited liability partnership that is a small business shall pay to the state an annual tax of one hundred dollars ($100) 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, 2018, is first organized under the laws of this state or has first 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 liability 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 liability partnership that reorganizes solely for the purpose of reducing its annual tax.
(5)This subdivision shall become operative on the effective date of any budget measure specifically appropriating funds to the Franchise Tax Board for its costs of administering this subdivision.
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, 2018, and before January 1, 2023, and is a small business in its second taxable year shall pay to the state a minimum franchise tax of one hundred dollars ($100) 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, 2018, is first incorporated under the laws of this state or has first 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 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), (i), are not five thousand dollars ($5,000) or less, an additional tax in the amount equal to one hundred dollars ($100) for the taxable year shall be due and payable on the due date of its return, without regard to extension, for that year.
(iii)This subparagraph shall become operative on the effective date of any budget measure specifically appropriating funds to the Franchise Tax Board for its costs of administering this subdivision.
(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 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.
(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, 2018, every new limited partnership that is a small business shall pay to the state an annual tax of one hundred dollars ($100) 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, 2018, 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, 2018, every new limited liability company that is a small business shall pay to the state an annual tax of one hundred dollars ($100) 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, 2018, 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 one hundred dollars ($100) 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, 2018, a new limited liability partnership that is a small business shall pay to the state an annual tax of one hundred dollars ($100) 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, 2018, 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, 2018, and is a small business in its second taxable year shall pay to the state a minimum franchise tax of one hundred dollars ($100) 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, 2018, 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 one hundred dollars ($100) 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.
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Date
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Status
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| Feb 1, 2018 | From committee: Filed with the Chief Clerk pursuant to Joint Rule 56. |
| Jan 31, 2018 | Died pursuant to Art. IV, Sec. 10(c) of the Constitution. |
| May 26, 2017 | In committee: Held under submission. |
| May 24, 2017 | In committee: Set, first hearing. Referred to APPR. suspense file. |
| May 17, 2017 | Re-referred to Com. on APPR. |
| May 16, 2017 | Read second time and amended. |
| May 15, 2017 | From committee: Amend, and do pass as amended and re-refer to Com. on APPR. (Ayes 8. Noes 1.) (May 8). |
| Mar 27, 2017 | In committee: Set, first hearing. Hearing canceled at the request of author. |
| Mar 9, 2017 | Referred to Com. on REV. & TAX. |
| Feb 19, 2017 | From printer. May be heard in committee March 21. |
| Feb 17, 2017 | Read first time. To print. |
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Date
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Description
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Location
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Votes
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| May 8, 2017 | Do pass as amended and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Revenue and Taxation |
Passed |
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
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Position
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Date
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|---|---|---|
| California Society Of Enrolled Agents | * Support | May 9, 2017 |
| California Tax Reform Association | ** Against | May 5, 2017 |
Date of Hearing: May 24, 2017
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez Fletcher, Chair
ABPCA Bill Id:AB 1256
Author:(Brough) – As Amended Ver:May 16, 2017
Policy Committee: | Revenue and Taxation | Vote: | 8 - 1 |
Urgency: No State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill, for taxable years 2018 through 2022, reduces the second taxable year’s minimum franchise tax (MFT) to $100 for a new small business that is a corporation, as defined, and reduces the first taxable year’s annual tax to $100 for new small businesses that are limited partnerships (LPs), limited liability partnerships (LLPs), or limited liability companies (LLCs), as defined. These reductions in the MFT and the annual tax are contingent upon an appropriation to the Franchise Tax Board (FTB) to implement this policy.
FISCAL EFFECT:
General Fund (GF) cost pressures of approximately $14 million in 2017-18, $47 million in 2018-19, and $70 million in 2019-20. These cost pressures reflect the potential GF revenue loss if the proposed reductions in the MFT and annual tax become operative once FTB receives an appropriation to administer them.
COMMENTS:
- Background on the MFT and the annual tax. Existing law imposes a franchise tax on all corporations doing business in California equal to 8.84% of its taxable income. The 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 limited liability company (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 and the annual tax were enacted to ensure that all corporations, LPs, LLPs, and 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, these taxes are not an income tax but rather a tax on the right to exercise the powers granted to those conducting business in California. Even when a business earns no income, it still receives the benefits of its corporate status, including limited liability protection under this state.
- Purpose. According to the author, AB 1256 will help new businesses survive their initial years. The author notes that under current law, even businesses that fail to make a profit still have to pay either the MFT or the annual tax. Supporters of the bill argue that AB 1256 will help fledgling businesses get off the ground.
- Related Legislation. AB 1085 (Calderon), which provides an LLC and corporations installment plan options for paying either the annual tax of the MFT, and AB 1432 (Melendez), which requires the California State University (CSU) to study the impact of the MFT and annual tax on California businesses, are both pending on this committee’s Suspense file. In addition, AB 1016 (Steinorth), which allows new LLCs to pay a prorated annual tax depending on when the articles of organization are filed, is also being heard today.
- Recent legislation. Since the 2009-10 Legislative Session, there have been a significant number of bills that aimed to reduce the MFT and the annual tax or to create an exception for certain kinds of businesses. Specifically:
In the 2015-16 Legislative Session, AB 612 (Patterson), which would have reduced the MFT to $400 for certain businesses, and SB 328 (Grove), which would have exempted certain businesses from the MFT, died in the Assembly Committee on Revenue and Taxation.
In the 2013-14 Legislative Session, AB 2428 (Patterson), which would have exempted businesses from the MFT for the first five years, AB 2495 (Melendez), which also would have exempted businesses from the MFT for the first five years, and AB 1769 (Debabneh), which would have exempted some businesses from the MFT for the first two years, died in the Assembly Committee on Revenue and Taxation. Moreover, AB 2466 (Nestande), which would have exempted certain types of businesses from the MFT, was held on this committee’s Suspense File, and SB 641 (Anderson), which would have eliminated the MFT for certain new corporations, was held on the Suspense File of the Senate Appropriations Committee. Finally, AB 1889 (Hagman), Chapter 700, Statutes of 2014, exempts certain small businesses entities from the MFT for up to the first two taxable years.
In the 2011-12 Legislative Session, AB 166 (Cook), which would have eliminated the MFT altogether, AB 368 (Morrell), which would have reduced the MFT to $400 for certain businesses, AB 821 (Garrick), which would have reduced the MFT to $100 for small business in the first ten years of operation, and AB 1605 (Garrick), which would have reduced the MFT for some business to $99, died in the Assembly Committee on Revenue and Taxation.
In the 2009-10 Legislative Session, AB 327 (Garrick) which would have reduced the MFT to $100, and AB 2126 (Garrick), which would have also reduced the MFT to $100, died in the Assembly Committee on Revenue and Taxation.
Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081
Date of Hearing: May 8, 2017
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
ABPCA Bill Id:AB 1256 (
Author:Brough) – As Introduced Ver:February 17, 2017
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Minimum franchise tax: annual tax: small business
SUMMARY: Reduces the minimum franchise tax to $100 for a new corporation in the second taxable year, and reduces the annual tax to $100 for new limited partnerships (LPs), new limited liability partnerships (LLPs), and new limited liability companies (LLCs) defined as small businesses in the first taxable year. Specifically, this bill:
- Provides, beginning on or after January 1, 2018, that every new LP, LLP, and LLC defined as a small business shall pay an annual tax of $100 for its first taxable year.
- Provides, beginning on or after January 1, 2018, that every new corporation defined as a small business shall pay a minimum franchise tax of $100 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 gross receipts from the production of business income and the gross receipts from the production of nonbusiness income, as defined in Revenue & Taxation Code (R&TC) Section 25120.
- Defines a "new LP" as an LP that is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations on 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 LLC, general partnership, a corporation, or any other form of business entity prior to its organization or that acquired its business operations from a partnership. 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 is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations on or after the time of its organization. A “new LLC” does not include any LLC that began business operations as, or acquired its business operations from, a sole proprietorship, a partnership, a corporation, or any other form of business entity prior to its organization or that acquired its business operations from an LLC. 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 is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations on or after the time of its organization. A “new LLP” does not include any LLP that began business operations as, or acquired its business operations from, a sole proprietorship, an LLC, a corporation, a partnership, or any other form of business entity prior to its organization or that acquired its business operations from an LLP. This reduction in the annual tax shall not apply to any LLP that reorganizes solely for the purpose of reducing its annual tax.
- Defines a "new corporation" as 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 on or after the time of its incorporation. A “new corporation” does not include any corporation that began business operations as, or acquired its business operations from, a sole proprietorship, a partnership, LLC, or any other form of business entity prior to its incorporation or that acquired its business operations from a corporation. This reduction in the minimum franchise tax shall not apply to any corporation that reorganizes solely for the purpose of reducing 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 $100 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 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 will reduce general fund revenue by $14 million in fiscal year (FY) 2017-18, $47 million in FY 2018-19, and $70 million in 2019-20.
COMMENTS:
- The author has provided the following statement in support of this bill:
California annually ranks near the bottom of business friendly states due to over-regulation and high tax rates. Small businesses continue to leave the state in search of greener pastures. 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, citing the state’s high taxes and burdensome regulations on business as the main factor for this ranking. California’s Minimum Franchise Tax is the highest in the nation. This all creates a disincentive for entrepreneurs who are contemplating opening a new business or relocating their business to California.
Current tax policy requires even businesses who fail to make a profit still have to pay the minimum franchise tax. This bill will not relieve all the startup costs a new businesses faces in California. However, AB 1256 will help new businesses survive the initial years by allowing them to retrain more capital up front for growth and hopefully play a critical part in building a more resilient state economy for the future.
- Supporters state this bill "eases the tax filing burden on new business owners by reducing the MFT in the first year of a new business while incrementally increasing the MFT to the full $800. This incremental increase allows business owners to pay less MFT while their fledging business is trying to get off the ground."
- Opponents argue that “[i]n the many years of bills on this issue, there has never been any evidence presented that the mft is a problem of business formation, particularly for the type of discretionary decision to use particular organizational forms contained in this bill.”
- Committee Staff Comments:
- One does not have to pay $800: Despite the laudable goal of the author to reduce the burden for new businesses, it is unclear if the $800 minimum franchise tax or annual tax serves as a barrier to conducting business. California allows individuals to open a business as a sole proprietor. A sole proprietorship is an unincorporated business that is owned by one person and is the simplest form of business organization to start and maintain. The business has no existence apart from the owner; its liabilities are the owner’s personal liabilities; and the owner undertakes the risks of the business for all assets owned, whether used in the business or personally owned. The owner includes the income and expenses of the business on the owner’s tax return. Formation documents are not required to be filed with the California Secretary of State’s (SOS) office, but other state filings may be required depending on the type of business. General partnerships are treated very similarly but are required to file a statement of partnership authority with the SOS. Although the structure and liabilities are different from other business entities, sole proprietorships and general partnerships can engage in business without having to pay the minimum franchise tax or the annual tax.
- 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 California, regardless of the business’s income or losses. Thus, the minimum tax is not an "income tax", but rather 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 California law.
- $800 for limited liability: By providing limited liability to certain entities, (e.g., LLCs, LLPs, and corporations), California is essentially allowing a business owner to transfer part of the cost of conducting business onto creditors and tort victims. (Jonathan Macey, The Limited Liability Company: Lessons for Corporate Law, Washington University Law Review, Vol. 73, Issue 2, 1995.) As an example, if an owner of a construction company, having limited liability, injures an individual during the course of business, the victim’s redress is limited to the assets of the company. If the company is insolvent, part of the cost of the injury is borne by the victim. Before the advent of LLCs and LLPs, that small business owner would have likely started the company as a sole proprietor or general partnership, allowing the victim to go after the personal assets of the owner.
As a public policy, California has decided that the risk borne by creditors and potential tort victims is outweighed by the need to encourage investment. Providing limited liability to small businesses, presumably with few or no assets, may cause owners of the business to only consider those marginal costs and benefits associated with the investments that they will internalize. In other words, “limited liability allows investors to pursue extremely risky projects and to profit from the pursuit of a ‘heads I win; tails you lose’ strategy of project finance.” (Id.) The idea that people will take on greater risk because someone else will pay for the costs is known as “moral hazard.” (Id.) This tends to occur when businesses are shielded from liability, but also when businesses lack financial resources to provide adequate compensation to creditors. (Id.) It may be argued that creditors, knowing that LLCs have limited liability, will require higher borrowing costs or ask personal guarantees from the individual owners. However, the person hit by a taxi cab or the victim of a toxic spill did not assume the potential risk of the company’s insolvency and owner's limited liability. (David Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability, Emory Law Journal, Vol. 65, Number 5, 2007.) The goal of providing limited liability appears to be the state’s need to promote investment by transferring risk from investors to creditors. (Id.) Therefore, LLCs and other limited liability structures provide a substantial benefit to entrepreneurs at a nominal cost of $800 per year, even when insolvent or operating at a loss.
- 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 of God 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. This bill attempts to aid new small businesses as they struggle to become profitable. However, it is unclear to Committee staff if reducing the minimum franchise tax will help struggling businesses succeed.
REGISTERED SUPPORT / OPPOSITION:
Support
California Society of Enrolled Agents
Opposition
California Tax Reform Association
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098
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). ↑
Date of Hearing: March 27, 2017
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
ABPCA Bill Id:AB 1256 (
Author:Brough) – As Introduced Ver:February 17, 2017
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Minimum franchise tax: annual tax: small business
SUMMARY: Reduces the minimum franchise tax to $100 for a new corporation in the second taxable year, and reduces the annual tax to $100 for new limited partnerships (LPs), new limited liability partnerships (LLPs), and new limited liability companies (LLCs) defined as small businesses in the first taxable year. Specifically, this bill:
- Provides, beginning on or after January 1, 2018, that every new LP, LLP, and LLC defined as a small business shall pay an annual tax of $100 for its first taxable year.
- Provides, beginning on or after January 1, 2018, that every new corporation defined as a small business shall pay a minimum franchise tax of $100 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 gross receipts from the production of business income and the gross receipts from the production of nonbusiness income, as defined in Revenue & Taxation Code (R&TC) Section 25120.
- Defines a "new LP" as an LP that is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations on 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 LLC, general partnership, a corporation, or any other form of business entity prior to its organization or that acquired its business operations from a partnership. 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 is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations on or after the time of its organization. A “new LLC” does not include any LLC that began business operations as, or acquired its business operations from, a sole proprietorship, a partnership, a corporation, or any other form of business entity prior to its organization or that acquired its business operations from an LLC. 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 is organized under the laws of this state or has qualified to transact intrastate business in this state that begins business operations on or after the time of its organization. A “new LLP” does not include any LLP that began business operations as, or acquired its business operations from, a sole proprietorship, an LLC, a corporation, a partnership, or any other form of business entity prior to its organization or that acquired its business operations from an LLP. This reduction in the annual tax shall not apply to any LLP that reorganizes solely for the purpose of reducing its annual tax.
- Defines a "new corporation" as 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 on or after the time of its incorporation. A “new corporation” does not include any corporation that began business operations as, or acquired its business operations from, a sole proprietorship, a partnership, LLC, or any other form of business entity prior to its incorporation or that acquired its business operations from a corporation. This reduction in the minimum franchise tax shall not apply to any corporation that reorganizes solely for the purpose of reducing 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 $100 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 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 will reduce general fund revenue by $14 million in fiscal year (FY) 2017-18, $47 million in FY 2018-19, and $70 million in 2019-20.
COMMENTS:
- The author has provided the following statement in support of this bill:
California annually ranks near the bottom of business friendly states due to over-regulation and high tax rates. Small businesses continue to leave the state in search of greener pastures. 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, citing the state’s high taxes and burdensome regulations on business as the main factor for this ranking. California’s Minimum Franchise Tax is the highest in the nation. This all creates a disincentive for entrepreneurs who are contemplating opening a new business or relocating their business to California.
Current tax policy requires even businesses who fail to make a profit still have to pay the minimum franchise tax. This bill will not relieve all the startup costs a new businesses faces in California. However, AB 1256 will help new businesses survive the initial years by allowing them to retrain more capital up front for growth and hopefully play a critical part in building a more resilient state economy for the future.
- Opponents argue that “[i]n the many years of bills on this issue, there has never been any evidence presented that the mft is a problem of business formation, particularly for the type of discretionary decision to use particular organizational forms contained in this bill.”
- Committee Staff Comments:
- One does not have to pay $800: Despite the laudable goal of the author to reduce the burden for new businesses, it is unclear if the $800 minimum franchise tax or annual tax serves as a barrier to conducting business. California allows individuals to open a business as a sole proprietor. A sole proprietorship is an unincorporated business that is owned by one person and is the simplest form of business organization to start and maintain. The business has no existence apart from the owner; its liabilities are the owner’s personal liabilities; and the owner undertakes the risks of the business for all assets owned, whether used in the business or personally owned. The owner includes the income and expenses of the business on the owner’s tax return. Formation documents are not required to be filed with the California Secretary of State’s (SOS) office, but other state filings may be required depending on the type of business. General partnerships are treated very similarly but are required to file a statement of partnership authority with the SOS. Although the structure and liabilities are different from other business entities, sole proprietorships and general partnerships can engage in business without having to pay the minimum franchise tax or the annual tax.
- 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 California, regardless of the business’s income or losses. Thus, the minimum tax is not an "income tax", but rather 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 California law.
- $800 for limited liability: By providing limited liability to certain entities, (e.g., LLCs, LLPs, and corporations), California is essentially allowing a business owner to transfer part of the cost of conducting business onto creditors and tort victims. (Jonathan Macey, The Limited Liability Company: Lessons for Corporate Law, Washington University Law Review, Vol. 73, Issue 2, 1995.) As an example, if an owner of a construction company, having limited liability, injures an individual during the course of business, the victim’s redress is limited to the assets of the company. If the company is insolvent, part of the cost of the injury is borne by the victim. Before the advent of LLCs and LLPs, that small business owner would have likely started the company as a sole proprietor or general partnership, allowing the victim to go after the personal assets of the owner.
As a public policy, California has decided that the risk borne by creditors and potential tort victims is outweighed by the need to encourage investment. Providing limited liability to small businesses, presumably with few or no assets, may cause owners of the business to only consider those marginal costs and benefits associated with the investments that they will internalize. In other words, “limited liability allows investors to pursue extremely risky projects and to profit from the pursuit of a ‘heads I win; tails you lose’ strategy of project finance.” (Id.) The idea that people will take on greater risk because someone else will pay for the costs is known as “moral hazard.” (Id.) This tends to occur when businesses are shielded from liability, but also when businesses lack financial resources to provide adequate compensation to creditors. (Id.) It may be argued that creditors, knowing that LLCs have limited liability, will require higher borrowing costs or ask personal guarantees from the individual owners. However, the person hit by a taxi cab or the victim of a toxic spill did not assume the potential risk of the company’s insolvency and owner's limited liability. (David Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability, Emory Law Journal, Vol. 65, Number 5, 2007.) The goal of providing limited liability appears to be the state’s need to promote investment by transferring risk from investors to creditors. (Id.) Therefore, LLCs and other limited liability structures provide a substantial benefit to entrepreneurs at a nominal cost of $800 per year, even when insolvent or operating at a loss.
- 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 of God 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. This bill attempts to aid new small businesses as they struggle to become profitable. However, it is unclear to Committee staff if reducing the minimum franchise tax will help struggling businesses succeed.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098
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
1H
Assembly Standing Committee on Appropriations
4MIN
Assembly Standing Committee on Revenue and Taxation
Bill Author
Bill Co-Author(s):