BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 2671 (Cook) Hearing Date: 08/02/2010 Amended: 07/15/2010 Consultant: Mark McKenzie Policy Vote: Rev&Tax 3-0 _________________________________________________________________ ____ BILL SUMMARY: AB 2671 would exempt corporations and limited liability companies (LLCs) from the minimum franchise tax and the annual LLC tax, respectively, if the corporation or LLC is a small business owned by a deployed member of the United States Armed Forces and that business ceases operation or operates at a loss. This exemption would be operative until taxable years beginning on or after January 1, 2018. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Tax revenue loss unknown revenue loss, potentially over $50 General (see staff comments) _________________________________________________________________ ____ STAFF COMMENTS: This bill may meet the criteria for referral to the Suspense File. Existing law imposes a minimum franchise tax of $800 on every corporation for the privilege of doing business in California. 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. This liability exists regardless of whether the corporation or LLC is earning income. Every corporation that incorporates or is qualified to do business in this state on or after January 1, 2000, is not subject to the minimum franchise tax for its first taxable year. AB 2671 would provide an exemption to the minimum franchise tax and annual LLC tax for businesses with total California income of $250,000 or less that operate at a loss or ceases operation in a taxable year, if the business is solely owned by a deployed member of the U.S. Armed Forces. Data from the Veterans Administration indicates that there are 16,870 deployed members of the U.S. Armed Forces with California addresses as of December 31, 2008. There is no known data that indicates how many deployed personnel are small business owners. Staff notes that the fiscal impact of this bill would depend upon the number of small business owners who are deployed in a given year, and whose business either operates at a loss or ceases operation in a taxable year. The Franchise Tax Board estimates that approximately 60 small corporations and LLCs owned by deployed U.S. Armed Forces members would either cease operation or operate at a loss in a given year, which would result in an annual revenue loss of $48,000. Actual losses are indeterminable, based on available data, and could be somewhat higher.