BILL ANALYSIS Ó
AB 831
Page 1
Date of Hearing: April 11, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 831 (Silva) - As Introduced: February 17, 2011
Majority vote. Fiscal committee.
SUBJECT : Annual minimum tax and fee: single member limited
liability company: exemptions.
SUMMARY : Exempts a single member limited liability company
(SMLLC), whose sole member is a tax-exempt organization, from
the minimum annual tax and the annual fee. Specifically, this
bill :
1)Exempts a SMLLC, whose sole member is a tax-exempt
organization, from the minimum annual tax, currently set at
$800.
2)Exempts a SMLLC, whose sole member is a tax-exempt
organization, from the annual fee, currently based on total
income from all California sources.
3)Exempts a SMLLC, whose sole member is a tax-exempt
organization, from filing a return and from verifying
liabilities under Revenue and Taxation Code Sections 17941 and
17942, the sole owners name and tax payer identification
number, and the owner's consent to California tax
jurisdiction, among other required information.
4)Requires a SMLLCs corporate status to be "active" before the
Franchise Tax Board (FTB) establishes the exemption.
5)Applies to taxable years beginning on or after January 1,
2012.
6)Takes effect immediately as a tax levy.
EXISTING LAW states that limited liability companies (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
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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. Specifically:
1)In addition to the minimum annual tax, every LLC, not taxable
as a corporation, is subject an LLC fee, and if applicable, a
non-consenting nonresident member tax. The LLC fee is based
on total income from all sources attributable to California
and applies to LLCs that are doing business in California,
registered or qualified to do business in California, or
formed in this state.
2)An LLC that has elected to be treated as a corporation for
federal tax purposes is not subject to the LLC fee, but is
subject to California corporate tax law. The tax is equal to
8.84% of the taxable income attributable to business done in
California. A minimum franchise tax of $800 is imposed if the
8.84% of the taxable income attributable to business done in
California is less than $800.
3)Tax credits earned by SMLLCs, whose sole member is a
tax-exempt organization, may only use the credit on the amount
of tax on the unrelated business income.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in a revenue loss of $7 million in fiscal year (FY)
2011-12, $8 million in FY 2012-13, and $9 million in FY 2013-14.
COMMENTS :
1)The author provided the following statement in support of this
bill:
"AB 831 will bring clarity and conformity to an otherwise
obtuse tax procedure and allow nonprofits to manage their
affairs in this limited area similar to other states."
2)The FTB provides the following information on other states:
a) Florida does not require an SMLLC to file a return, but
the income must be included in the return of the single
member parent.
b) Illinois and Massachusetts follow federal rules for
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SMLLCs and does not require a SMLLC to file a separate
return.
c) Michigan allows a SMLLC to file a separate Michigan
Business Tax return or file as part of a unitary group
return.
d) Minnesota treats the income from a SMLLC as if received
directly from the single member owner.
e) New York conforms to federal rules, but requires that
the SMLLC file a separate information return for New York.
3)The FTB staff notes all of the following:
a) The credit use by a SMLLC, whose sole member is a
tax-exempt organization, is limited to unrelated business
income. This bill would eliminate the filing requirement
for the SMLLC and could result in complicating the
administration of computing the correct tax amount without
FTB referring to a tax return.
b) The operative date of the changes to returns is one year
earlier than the operative date for the exemption from the
tax and fee. If this was not the intent, then an amendment
should be made to provide an operative date for returns for
taxable years beginning on or after January 1, 2012.
c) The FTB uses the information filed to determine if an
LLC is incorrectly claiming to be an exempt entity. If the
filing requirement is removed, as proposed by this bill, it
would be difficult for FTB to regulate false claims and the
FTB could expect additional protests and appeals from LLCs
that incorrectly claim to fall under this exception.
d) Insurers are exempt by the California Constitution, not
by any provision in Part 11 of the Revenue and Taxation
Code. The language regarding insurers should be removed.
REGISTERED SUPPORT / OPPOSITION :
Support
The Nonprofit and Unincorporated Organizations Committee of the
Business Law Section
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of the State Bar of California.
Opposition
American Federation of State, County and Municipal Employees.
Analysis Prepared by : Myriam Bouaziz and Oksana Jaffe / REV. &
TAX. / (916) 319-2098