BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 1677 HEARING: 6/20/12 AUTHOR: Nestande FISCAL: Yes VERSION: 6/4/12 TAX LEVY: No CONSULTANT: Phan NONPROFIT ORGANIZATION'S TAX POLICY Raises the FTB filing threshold for certain charities from $25,000 to $50,000. Background and Existing Law I. Federal Law: Certain corporations qualify for tax-exempt status with the Internal Revenue Service (IRS). The Internal Revenue Code Sections 501(c) and 501(d) list categories of tax-exempt organizations, such as religious, charitable, scientific, literary, or educational organizations. Generally, tax-exempt organizations file an annual information return, but some small organizations are exempt from this annual filing requirement. Prior to 2010, the IRS allowed tax-exempt organizations with gross revenue or assets below $25,000 to file a simpler, online e-Postcard called Form 990-N. In 2010, the IRS raised the filing threshold so that tax-exempt organizations with gross revenue or assets below $50,000 did not have to file the various 990 Forms, only the e-Postcard. II. California Law: California's laws on tax-exempt organizations generally conform to federal laws. The FTB typically requires tax-exempt organizations to file a two-page annual information return, FTB Form 199, and pay a $10 filing fee, by the 15th day of the fifth full calendar month following the close of the taxable year. California law exempts some organizations, including churches, their integrated auxiliaries, and conventions or association of churches, from these annual filings. Similar to the IRS's policy, tax-exempt organizations with gross revenue or assets below $25,000 do not have to file the FTB Form 199. They can choose to file the simpler, online e-Postcard called Form 199-N. When the IRS raised its filing threshold in 2010 to $50,000, California's filing threshold remained at $25,000. AB 1677 -- 6/4/12 -- Page 2 Proposed Law Assembly Bill 1677 exempts tax-exempt organizations, as specified, with gross receipts not more than $50,000 in each taxable year from filing an annual return with the FTB. This amendment applies to taxable years beginning on or after January 1, 2012. State Revenue Impact The FTB estimates that this bill will have the following impact on state revenue: ----------------------------------------------------------- |2012-2013 |2013-2014 |2014-2015 | |-------------------+-------------------+-------------------| |-$90,000 |-$100,000 |-$100,000 | ----------------------------------------------------------- Comments 1. Purpose of the bill . AB 1677 conforms state tax laws to federal tax laws and relieves the annual filing burden for some small tax-exempt organizations. When the IRS raised its filing threshold to $50,000, California's tax-exempt organizations with gross revenue or assets between $25,000 and $50,000 found they no longer had to file the extensive 990 Forms with the IRS but still had to file the complicated 199 Forms with the FTB. The IRS recognizes that tax-exempt organizations with gross revenue or assets below $50,000 should not be burdened with certain filing requirements. This bill will allow the same treatment for CA's tax-exempt organizations, allowing these charities to use their resources on charity related purposes instead of expending their finances to meet FTB filing requirements. The FTB estimates that this bill will impact approximately 10,000 tax-exempt organizations annually. This bill will not only ease the reporting burden on these organizations, AB 1677 -- 6/4/12 -- Page 3 it will save FTB staff's time and resources because they can review more of the simpler 199-N Forms. 2. A minimal requirement . Because SB 1526 exempts certain organizations from filing Form 199, the state will lose approximately $100,000 annually in filing fee revenue. However, the FTB Form 199 is only 2 pages long. Although it is more complicated than the e-Postcard Form 199-N, Form 199 costs only $10 to file and is not exponentially more burdensome than Form 199-N. The Committee may wish to consider whether eliminating this minimal filing requirement justifies the annual state revenue loss. 3. Mirror, mirror . Besides some technical differences, AB 1677 and SB 1526 (LaMalfa, 2012) are identical and will chapter each other out if both pass. SB 1526 passed out of the Governance and Finance Committee on a 7-0 vote. SB 1526 will next be heard in the Assembly Revenue and Taxation Committee. Assembly Actions Assembly Revenue and Taxation 9-0 Assembly Appropriations 17-0 Assembly Floor 74-0 Support and Opposition (6/14/12) Support : Navy League; Blindness Support Services, Inc.; Coachella Valley Rescue Mission; General Patton Memorial Museum Inc. Opposition : Unknown.