AB 778: Taxation: corporations: minimum franchise tax: limited liability companies: annual tax: small businesses.
- Session Year: 2023-2024
- House: Assembly
- Latest Version Date: 2023-02-13
Current Status:
Failed
(2024-02-01: From committee: Filed with the Chief Clerk pursuant to Joint Rule 56.)
Introduced
In Committee
First Chamber
In Committee
Second Chamber
Enacted
What does this bill do?
The bill lets California corporations incorporated in the state, and limited partnerships, limited liability companies, and limited liability partnerships, skip the state’s minimum annual franchise tax (typically $800) until the first year the business has $20,000 or more in gross receipts. It also requires the Franchise Tax Board to track and report how many new small businesses are excluded under this change and sets a goal and performance measure for that reporting.
The summary is provided by generative AI which can make mistakes. For original language, please view the details in the table below.
Existing law imposes an annual 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 also imposes an annual tax in an amount equal to the minimum franchise tax on every limited partnership, limited liability partnership, and limited liability company doing business in this state, as specified.
This bill, for taxable years beginning on or after January 1, 2023, would exempt corporations incorporated in this state from the minimum franchise tax until the first taxable year in which the corporation has gross receipts of $20,000. The bill would also exempt a limited partnership, limited liability partnership, and limited liability company from the annual tax until the first taxable year in which the business has gross receipts of $20,000.
Existing law requires any bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.
The bill also would include additional information required for any bill authorizing a new income tax expenditure.
This bill would take effect immediately as a tax levy.
(a)Except as provided in subdivision (f), for 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 Section 23153. 23153, except as otherwise provided in this section.
(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)Every limited partnership doing business in this state as described in subdivision (a) that files a certificate of limited partnership or registers with the Secretary of the State pursuant to subdivision (b) on or after January 1, 2021, and before January 1, 2024, shall not be subject to the tax imposed under this section for its first taxable year.
(2)This subdivision shall become operative only for a taxable year in which any budget measure appropriates one dollar ($1) or more to the Franchise Tax Board for the costs associated with administration of this subdivision.
(g)Except as otherwise provided, for taxable years beginning on or after January 1, 2023, a limited partnership shall not be required to pay the applicable amount specified in Section 23153 until the first taxable year in which the limited partnership has gross receipts of twenty thousand dollars ($20,000) or greater.
SEC. 2.Section 17941 of the Revenue and Taxation Code is amended to read:17941.(a)Except as provided in subdivision (g), for 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 subdivision (d) of Section 23153 for the taxable year. year, except as otherwise provided in this section.
(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, for taxable years beginning on or after January 1, 2020, 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, 2030.
(g)(1)Every limited liability company doing business in this state as described in subdivision (a) that organizes or registers with the Secretary of the State pursuant to subdivision (b) on or after January 1, 2021, and before January 1, 2024, shall not be subject to the tax imposed under this section for its first taxable year.
(2)This subdivision shall become operative only for a taxable year in which any budget measure appropriates one dollar ($1) or more to the Franchise Tax Board for the costs associated with administration of this subdivision.
(h)Except as otherwise provided, for taxable years beginning on or after January 1, 2023, a limited liability company shall not be required to pay the applicable amount specified in Section 23153 until the first taxable year in which the limited liability company has gross receipts of twenty thousand dollars ($20,000) or greater.
SEC. 3.Section 17948 of the Revenue and Taxation Code is amended to read:17948.(a)Except as provided in subdivision (e), for 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. year, except as otherwise provided in this section.
(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)Every limited liability partnership doing business in this state as described in subdivision (a) that registers with the Secretary of the State pursuant to subdivision (b) on or after January 1, 2021, and before January 1, 2024, shall not be subject to the tax imposed under this section for its first taxable year.
(2)This subdivision shall become operative only for a taxable year in which any budget measure appropriates one dollar ($1) or more to the Franchise Tax Board for the costs associated with administration of this subdivision.
(f)Except as otherwise provided, for taxable years beginning on or after January 1, 2023, a limited liability partnership shall not be required to pay the applicable amount specified in Section 23153 until the first taxable year in which the limited liability partnership has gross receipts of twenty thousand dollars ($20,000) or greater.
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)(A)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).
(B)Notwithstanding subparagraph (A), for taxable years beginning on or after January 1, 2023, a corporation shall not be required to pay the minimum franchise tax until the first taxable year in which the corporation has gross receipts of twenty thousand dollars ($20,000) or greater.
(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)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.
(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, 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), for taxable years beginning on or after January 1, 2020, 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, 2030.
(j)(1)For the purposes of complying with Section 41 of the Revenue and Taxation Code, in relation to the amendments made to this section and Sections 17935, 17941, and 17948 by the act that added this subdivision, referred to as the exclusions, the Legislature finds and declares the following:
(A)The goal, purpose, or objective of the exclusions is to relieve the financial burden for new small businesses in California.
(B)The performance indicator for the Legislature to use when measuring whether the exclusions meet the goal, purpose, or objective specified in subparagraph (A) is the number of registered new small and microbusinesses in California.
(2)(A)On or before January 1, 2029, the Franchise Tax Board shall provide a report to the Assembly Revenue and Taxation Committee and the Senate Governance and Finance Committee on the number of new businesses in California not subject to the minimum franchise tax or the annual tax pursuant to the exclusions. The report shall be provided in compliance with Section 9795 of the Government Code.
(B)The disclosure requirements of this subdivision shall be treated as an exception to Section 19542.
SEC. 5.This act provides for a tax levy within the meaning of Article IV of the California Constitution and shall go into immediate effect.
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Date
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Status
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| Feb 1, 2024 | From committee: Filed with the Chief Clerk pursuant to Joint Rule 56. |
| Jan 31, 2024 | Died pursuant to Art. IV, Sec. 10(c) of the Constitution. |
| May 1, 2023 | In committee: Set, second hearing. Held under submission. |
| Mar 21, 2023 | In committee: Set, first hearing. Referred to REV. & TAX. suspense file. |
| Feb 23, 2023 | Referred to Com. on REV. & TAX. |
| Feb 14, 2023 | From printer. May be heard in committee March 16. |
| Feb 13, 2023 | Read first time. To print. |
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 Association Of Licensed Investigators | ** Support | |
| California Chamber Of Commerce | ** Support | |
| California Society Of Enrolled Agents | ** Support | |
| California Tax Reform Association | ** Against | |
| California Teachers Association | ** Against |
Date of Hearing: May 1, 2023
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Jacqui Irwin, Chair
ABPCA Bill Id:AB 778 (
Author:Ta) – As Introduced Ver:February 13, 2023
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Taxation: corporations: minimum franchise tax: limited liability companies: annual tax: small businesses
SUMMARY: Exempts, for taxable years beginning on or after January 1, 2023, corporations and other business entities from the minimum franchise or annual tax until the first taxable year in which the corporation or business entity has gross receipts of at least $20,000. Specifically, this bill:
- Exempts, under the Corporation Tax (CT) Law, corporations incorporated in California from the minimum franchise tax until the first taxable year in which the corporation has gross receipts of at least $20,000.
- Exempts, under the Personal Income Tax (PIT) Law, limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs) from the annual tax until the first taxable year in which the business has gross receipts of at least $20,000.
- Finds and declares the following for the purposes of satisfying the requirements of Revenue and Taxation Code (R&TC) Section 41:
- The specific goal, purpose, and objective of this bill is to relieve the financial burden for new small businesses in California.
- To measure whether this bill achieves its intended purpose, the Franchise Tax Board (FTB) shall prepare a written report detailing the number of new businesses in California not subject to the minimum franchise tax or annual tax.
- Requires the FTB to provide the written report required under this bill to the Assembly Committee on Revenue and Taxation and the Senate Committee on Governance and Finance no later than January 1, 2029.
- Provides that the disclosure requirements of this bill shall be treated as an exception to R&TC Section 19542.
- Takes immediate effect as a tax levy.
EXISTING LAW:
- Imposes a franchise tax on all corporations doing business in the state 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] (R&TC 23153)
- Provides exceptions with respect to imposition of the minimum franchise tax, including but not limited to, credit unions and nonprofit organizations. A corporation is not subject to the minimum franchise tax for its first taxable year; however, a corporation 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. Commonly referred to as pass-through entities, these 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. However, every LP, LLP and LLC, not classified as a corporation, that organizes, registers, or files with the California Secretary of State on or after January 1, 2021, and before January 1, 2024, is exempt from the annual tax for its first taxable year. (R&TC Sections 17935, 17941, & 17948).
- Provides exemptions from the minimum franchise tax and annual tax for a corporation or a limited liability company that are small businesses solely owned by a deployed member of the United States Armed Forces for taxable years beginning on or after January 1, 2020, and before January 1, 2030. (R&TC Sections 17941 & 23153).
- Defines a "small business" as an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which has 100 or fewer employees, and average annual gross receipts of $15 million or less over the previous three years. Alternatively, a "small business" may also be a manufacturer with less than 100 employees that is primarily engaged in the chemical or mechanical transformation of raw materials or processed substances into new products, and is classified between Codes 31 to 33, inclusive, of the North American Industry Classification System (NAICS). (Government Code Section 14837).
- Defines a "micro business" as a business with average annual gross receipts of $5 million or less over the previous three years, or a manufacturer with less than 25 employees that is primarily engaged in the chemical or mechanical transformation of raw materials or processed substances into new products, and is classified between Codes 31 to 33, inclusive, of the NAICS.
FISCAL EFFECT: The FTB estimates General Fund revenue losses of $550 million in fiscal year (FY) 2023-24, $410 million in FY 2024-25, and $370 million in FY 2025-26.
COMMENTS:
- The author has provided the following statement in support of this bill:
California's vital small business owners and employees have been devastated by the COVID-19 pandemic and the state's mandated closure. In addition, excessive taxes and burdensome regulations have prompted tens of thousands of small businesses to leave the state or close their doors. AB 778 would give a new business that opens in California the ability to become a viable operation before the state begins to collect money which could be devastating to companies in which $800 could be the difference between staying open or closing down.
- In support of this bill, the California Chamber of Commerce notes, in part:
California law imposes taxes on employers including an annual franchise tax for doing business in this state. AB 778 would allow new businesses to become viable before California assesses a minimum franchise tax. This bill would help small employers by allowing them to allocate this amount towards other businesses endeavors rather than state mandated overhead. The exemption would not be permanent, but rather, give the new business the opportunity to become viable prior to paying the tax. Small businesses are the cornerstone of California’s economy. They have shouldered a tremendous burden to retain their employees and continue operating despite a number of obstacles over the past several years.
- In opposition to this bill, the California Tax Reform Association notes, in part:
According to the California Franchise Tax Board, AB778 would result in General Fund revenue loses of over $1.3 billion in the next three years. Because it lacks a sunset, this loss would continue indefinitely. Given these factors, it is doubtful that AB778 is an appropriate use of state revenue at this time… Numerous exemptions to the minimum franchise tax already exist, including exclusions established during COVID-19 intended to provide new business owners relief. As a result, first year LLC, LLP and LP’s are exempt from the annual minimum tax through 2024.
- Committee Staff Comments:
- Existing business tax exemptions: For taxable years beginning on or after January 1, 2021, and before January 1, 2024, Chapter 8 of the Statutes of 2020 (AB 85), created a first-year exemption from the annual tax for every LLC, LLP, and LP. The FTB, using first time registration data from the Secretary of State for the 2021 taxable year, estimates that a total of 293,794 qualified as first-year LLCs, LPs, and LLPs.
In addition to the first-year annual tax exemption described above, an LLC that is a small business solely owned by a deployed member of the United States Armed Forces is not subject to the annual tax for any taxable year that the owner is deployed, and the LLC operates at a loss or ceases operation. This exemption is operative for taxable years beginning on or after January 1, 2020, and before January 1, 2030.
- A person does not need to pay $800 to conduct business in California: California allows an individual 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 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 the annual fee were enacted to ensure that all corporations, LPs, LLPs, and LLCs pay at least a minimum amount of tax for the privilege of doing business in California regardless of the businesses' 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.
- Inflation: California's minimum franchise tax was increased to $800 in 1990 and has remained at $800 ever since. Due to inflation, the cost of the minimum franchise tax has been significantly reduced. The $800 minimum franchise tax in 1990 would cost $1,879 in January 2023 dollars.[2] Therefore, the minimum franchise tax has functionally been cut by more than one-half since the tax was imposed in 1990.
- What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues).
As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are typically reviewed less frequently than direct expenditures. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote.
- Committee's tax expenditure policy: Both R&TC Section 41 and Committee policy require any tax expenditure bill to outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements.
In its current form, this bill states that the goal of these exemptions is to relieve the financial burden for new small businesses in California. Additionally, this bill provides that the performance indicator for the Legislature to use when measuring whether the exemptions meet the goals outlined is the number of registered new small and microbusinesses in California. This bill as currently drafted, complies with the Section 41 requirements.
In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. According to this policy, an "appropriate sunset provision" means five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean ten years. This bill, as currently drafted, does not comply with the Committee's policy on sunset dates, and is therefore not eligible for a vote in its current form.
- Prior legislation:
- AB 91 (Valladares), of the 2021-22 Legislative Session, would have reduced, under the PIT Law, the annual tax for LPs, LLPs, and LLCs not classified as corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. In addition, under the CT Law, AB 91 would have reduced the minimum franchise tax for corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. AB 91 did not pass out of this Committee.
- AB 632 (Ramos), of the 2021-22 Legislative Session, would have reduced, under the PIT Law, the annual tax on LPs, LLPs, and LLCs not classified as corporations for taxable years beginning on or after January 1, 2022, and before January 1, 2027. In addition, this bill would have reduced, under the CT Law, the annual tax on franchise tax for taxable years beginning on or after January 1, 2022, and before January 1, 2027. AB 632 was not heard by this Committee.
- AB 806 (Chen), of the 2021-22 Legislative Session, would have exempted, under the PIT Law, LPs, LLPs, and LLCs not classified as corporations from the payment of the annual tax for taxable years beginning on or after January 1, 2020, and before January 1, 2023. In addition, this bill would have exempted, under the CT Law, corporations from the payment of the minimum franchise tax for taxable years beginning on or after January 1, 2020, and before January 1, 2023. AB 806 was not heard by this Committee.
- AB 85 (Committee on Budget), Chapter 8, Statutes of 2020, provided, under the PIT Law, a first year exemption from the annual tax for LPs, LLPs, and LLCs not classified as corporations for taxable years beginning on or after January 1, 2020, and before January 1, 2024.
- SB 349 (Portantino), of the 2019-20 Legislative Session, would have reduced, under the CT Law, the minimum franchise tax imposed on corporations based on the corporation's gross receipts for taxable years beginning on or after January 1, 2020, and before January 1, 2025. SB 349 was vetoed.
- AB 308 (Muratsuchi), Chapter 421, Statutes of 2019, extends, under the PIT Law and CT Law, exemptions from the annual tax or the minimum franchise tax for certain small business LLCs and corporations that are solely owned by a deployed member of the U.S. Armed Forces, and the LLC or corporation operates at a loss or cease to operate, for taxable years beginning on or after January 1, 2020, and before January 1, 2030.
- AB 91 (Valladares), of the 2021-22 Legislative Session, would have reduced, under the PIT Law, the annual tax for LPs, LLPs, and LLCs not classified as corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. In addition, under the CT Law, AB 91 would have reduced the minimum franchise tax for corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. AB 91 did not pass out of this Committee.
- Prior legislation:
REGISTERED SUPPORT / OPPOSITION:
Support
California Association of Licensed Investigators
California Chamber of Commerce
California Society of Enrolled Agents
Opposition
California Tax Reform Association
California Teachers Association
Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098
According to the 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). ↑
Consumer Price Index, Inflation Calculator. Bureau of Labor Statistics. https://www.bls.gov/data/inflation_calculator.htm. ↑
Date of Hearing: March 20, 2023
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Jacqui Irwin, Chair
ABPCA Bill Id:AB 778 (
Author:Ta) – As Introduced Ver:February 13, 2023
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Taxation: corporations: minimum franchise tax: limited liability companies: annual tax: small businesses
SUMMARY: Exempts, for taxable years beginning on or after January 1, 2023, corporations and other business entities from the minimum franchise or annual tax until the first taxable year in which the corporation or business entity has gross receipts of at least $20,000. Specifically, this bill:
- Exempts, under the Corporation Tax (CT) Law, corporations incorporated in California from the minimum franchise tax until the first taxable year in which the corporation has gross receipts of at least $20,000.
- Exempts, under the Personal Income Tax (PIT) Law, limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs) from the annual tax until the first taxable year in which the business has gross receipts of at least $20,000.
- Finds and declares the following for the purposes of satisfying the requirements of Revenue and Taxation Code (R&TC) Section 41:
- The specific goal, purpose, and objective of this bill is to relieve the financial burden for new small businesses in California.
- To measure whether this bill achieves its intended purpose, the Franchise Tax Board (FTB) shall prepare a written report detailing the number of new businesses in California not subject to the minimum franchise tax or annual tax.
- Requires the FTB to provide the written report required under this bill to the Assembly Committee on Revenue and Taxation and the Senate Committee on Governance and Finance no later than January 1, 2029.
- Provides that the disclosure requirements of this bill shall be treated as an exception to R&TC Section 19542.
- Takes immediate effect as a tax levy.
EXISTING LAW:
- Imposes a franchise tax on all corporations doing business in the state 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] (R&TC 23153)
- Provides exceptions with respect to imposition of the minimum franchise tax, including but not limited to, credit unions and nonprofit organizations. A corporation is not subject to the minimum franchise tax for its first taxable year; however, a corporation 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. Commonly referred to as pass-through entities, these 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. However, every LP, LLP and LLC, not classified as a corporation, that organizes, registers, or files with the California Secretary of State on or after January 1, 2021, and before January 1, 2024, is exempt from the annual tax for its first taxable year. (R&TC Sections 17935, 17941, & 17948).
- Provides exemptions from the minimum franchise tax and annual tax for a corporation or a limited liability company that are small businesses solely owned by a deployed member of the United States Armed Forces for taxable years beginning on or after January 1, 2020, and before January 1, 2030. (R&TC Sections 17941 & 23153).
- Defines a "small business" as an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which has 100 or fewer employees, and average annual gross receipts of $15 million or less over the previous three years. Alternatively, a "small business" may also be a manufacturer with less than 100 employees that is primarily engaged in the chemical or mechanical transformation of raw materials or processed substances into new products, and is classified between Codes 31 to 33, inclusive, of the North American Industry Classification System (NAICS). (Government Code Section 14837)
- Defines a "micro business" as a business with average annual gross receipts of $5 million or less over the previous three years, or a manufacturer with less than 25 employees that is primarily engaged in the chemical or mechanical transformation of raw materials or processed substances into new products, and is classified between Codes 31 to 33, inclusive, of the NAICS.
FISCAL EFFECT: The FTB estimates General Fund revenue losses of $550 million in fiscal year (FY) 2023-24, $410 million in FY 2024-25, and $370 million in FY 2025-26.
COMMENTS:
- The author has provided the following statement in support of this bill:
California's vital small business owners and employees have been devastated by the COVID-19 pandemic and the state's mandated closure. In addition, excessive taxes and burdensome regulations have prompted tens of thousands of small businesses to leave the state or close their doors. AB 778 would give a new business that opens in California the ability to become a viable operation before the state begins to collect money which could be devastating to companies in which $800 could be the difference between staying open or closing down.
- Committee Staff Comments:
- Existing business tax exemptions: For taxable years beginning on or after January 1, 2021, and before January 1, 2024, Chapter 8 of the Statutes of 2020 (AB 85), created a first-year exemption from the annual tax for every LLC, LLP, and LP. The FTB, using first time registration data from the Secretary of State for the 2021 taxable year, estimates that a total of 293,794 qualified as first-year LLCs, LPs, and LLPs.
In addition to the first-year annual tax exemption described above, an LLC that is a small business solely owned by a deployed member of the United States Armed Forces is not subject to the annual tax for any taxable year that the owner is deployed, and the LLC operates at a loss or ceases operation. This exemption is operative for taxable years beginning on or after January 1, 2020, and before January 1, 2030.
- A person does not need to pay $800 to conduct business in California: California allows an individual 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 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 the annual fee were enacted to ensure that all corporations, LPs, LLPs, and LLCs pay at least a minimum amount of tax for the privilege of doing business in California regardless of the businesses' 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.
- Inflation: California's minimum franchise tax was increased to $800 in 1990 and has remained at $800 ever since. Due to inflation, the cost of the minimum franchise tax has been significantly reduced. The $800 minimum franchise tax in 1990 would cost $1,879 in January 2023 dollars.[2] Therefore, the minimum franchise tax has functionally been cut by more than one-half since the tax was imposed in 1990.
- What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues).
As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are typically reviewed less frequently than direct expenditures. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote.
- Committee's tax expenditure policy: Both R&TC Section 41 and Committee policy require any tax expenditure bill to outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements.
In its current form, this bill states that the goal of these exemptions is to relieve the financial burden for new small businesses in California. Additionally, this bill provides that the performance indicator for the Legislature to use when measuring whether the exemptions meet the goals outlined is the number of registered new small and microbusinesses in California. This bill as currently drafted, complies with the Section 41 requirements.
In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. According to this policy, an "appropriate sunset provision" means five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean ten years. This bill, as currently drafted, does not comply with the Committee's policy on sunset dates, and is therefore not eligible for a vote in its current form.
- Prior legislation:
- AB 91 (Valladares), of the 2021-22 Legislative Session, would have reduced, under the PIT Law, the annual tax for LPs, LLPs, and LLCs not classified as corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. In addition, under the CT Law, AB 91 would have reduced the minimum franchise tax for corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. AB 91 did not pass out of this Committee.
- AB 632 (Ramos), of the 2021-22 Legislative Session, would have reduced, under the PIT Law, the annual tax on LPs, LLPs, and LLCs not classified as corporations for taxable years beginning on or after January 1, 2022, and before January 1, 2027. In addition, this bill would have reduced, under the CT Law, the annual tax on franchise tax for taxable years beginning on or after January 1, 2022, and before January 1, 2027. AB 632 was not heard by this Committee.
- AB 806 (Chen), of the 2021-22 Legislative Session, would have exempted, under the PIT Law, LPs, LLPs, and LLCs not classified as corporations from the payment of the annual tax for taxable years beginning on or after January 1, 2020, and before January 1, 2023. In addition, this bill would have exempted, under the CT Law, corporations from the payment of the minimum franchise tax for taxable years beginning on or after January 1, 2020, and before January 1, 2023. AB 806 was not heard by this Committee.
- AB 85 (Committee on Budget), Chapter 8, Statutes of 2020, provided, under the PIT Law, a first year exemption from the annual tax for LPs, LLPs, and LLCs not classified as corporations for taxable years beginning on or after January 1, 2020, and before January 1, 2024.
- SB 349 (Portantino), of the 2019-20 Legislative Session, would have reduced, under the CT Law, the minimum franchise tax imposed on corporations based on the corporation's gross receipts for taxable years beginning on or after January 1, 2020, and before January 1, 2025. SB 349 was vetoed.
- AB 308 (Muratsuchi), Chapter 421, Statutes of 2019, extends, under the PIT Law and CT Law, exemptions from the annual tax or the minimum franchise tax for certain small business LLCs and corporations that are solely owned by a deployed member of the U.S. Armed Forces, and the LLC or corporation operates at a loss or cease to operate, for taxable years beginning on or after January 1, 2020, and before January 1, 2030.
- AB 91 (Valladares), of the 2021-22 Legislative Session, would have reduced, under the PIT Law, the annual tax for LPs, LLPs, and LLCs not classified as corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. In addition, under the CT Law, AB 91 would have reduced the minimum franchise tax for corporations that are small businesses or microbusinesses for taxable years beginning on or after January 1, 2022 and before January 1, 2027. AB 91 did not pass out of this Committee.
- Prior legislation:
REGISTERED SUPPORT / OPPOSITION:
Support
None on file
Opposition
None on file
Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098
According to the 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). ↑
Consumer Price Index, Inflation Calculator. Bureau of Labor Statistics. https://www.bls.gov/data/inflation_calculator.htm. ↑
Discussed in Hearing
3MIN
Assembly Standing Committee on Revenue and Taxation
Bill Author
Bill Co-Author(s):