BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1413 HEARING: 7/3/13
AUTHOR: Committee on Revenue & TaxationFISCAL: Yes
VERSION: 3/19/13 TAX LEVY: No
CONSULTANT: Grinnell
TENTATIVE MINIMUM TAX CREDITS AND EXEMPT ORGANIZATIONS
Makes Clarifying Changes Regarding the Treatment of Motion
Picture Production Credit and Exempt Organizations.
Background and Existing Law
I. Motion Picture Production Tax Credit and the Tentative
Minimum Tax. In 2009, Governor Schwarzenegger signed the
California Film & Television Tax Credit Program (Film Tax
Credit Program) as a part of the 2009 Budget plan to grant
a credit to taxpayers producing motion pictures (SBx3 15,
Calderon/ABx3 15, Krekorian, 2009). The motion picture
production credit can be shared within a corporation's
commonly controlled group, and credits for shooting
independent films may be sold by taxpayers who produced the
movie to unrelated taxpayers.
Generally, state law does not allow taxpayers to use tax
credits to reduce its tax liability under the tentative
minimum tax (TMT); a part of the alternative minimum tax
(AMT) intended to ensure that corporations that receive
significant tax liability pay some share of the cost of
public services. Without an AMT, corporations with
significant tax credits can avoid taxes altogether when the
value of the credits it applies exceeds its net income in a
taxable year. To calculate AMT, a taxpayer compares his or
her regular tax before applying credits to his or her TMT,
a tax calculated using a separate method for deriving
income that reduces or eliminates the effect of exclusions
or deductions. If TMT exceeds regular tax, the difference
is the taxpayer's AMT. However, in so doing, the taxpayer
generates an AMT credit that he or she can use in future
years.
Generally, taxpayers can't use some credits to reduce TMT;
however, the Legislature has allowed some credits to do so,
AB 1413 - 3/19/13 -- Page 2
such as:
Research and Development Tax Credit,
Geographically Targeted Economic Development Area,
such as Enterprise Zone, hiring and sales and use tax
credit),
Now-expired solar energy credits.
II. Exempt Organizations. Tax law has treated
organizations that serve charitable purposes and exist to
serve its members differently from businesses seeking a
profit since Congress enacted the Tariff Act of 1894. That
Act levied a corporate income tax, but excluded
"corporations, companies, or associations organized and
conducted solely for charitable, religious, or educational
purposes, including fraternal beneficiary associations."
Congress believed that these agencies filled a gap in
social welfare programs that the government did not yet
provide, and taxing these entities would divert needed
resources away from them.
Internal Revenue Code (IRC) 501(c) describes the various
forms of organizations that are exempt from the federal
income tax. Most charities, churches, and other tax-exempt
organizations operate under 501(c) (3). However, the IRC
501(c) includes other kinds of groups that are similarly
tax-exempt, such as:
501(c)(4)s - Civic leagues, social welfare
organizations (including certain war veterans'
organizations,) or local associations of employees,
501(c)(5)s - Labor, agricultural, or horticultural
organizations,
501(c) (6) s - Business leagues, chambers of
commerce, etc.
501(c)(7)s - Social Clubs
In California, nonprofit corporations are not necessarily
tax-exempt ones, regardless of federal status. Persons
create nonprofit corporations when they file articles of
incorporation with the Secretary of State, and must file
statements of information annually or semiannually or have
its status revoked. All nonprofits must apply to the
Franchise Tax Board (FTB) for tax-exempt status and pay a
$25 fee, or provide FTB with a copy of the Internal Revenue
Service's (IRS's) determination that the organization is
tax-exempt under the Internal Revenue Code (AB 897,
Houston, 2008). FTB then notifies the organization of its
determination, or its acknowledgement of the IRS
AB 1413 - 3/19/13 -- Page 3
determination, either of which entitles the organization to
an exemption from both the Corporation Tax. Nonprofits
that do not obtain approval from FTB for their tax-exempt
application are subject to tax regardless of its use of its
money.
Proposed Law
Assembly Bill 1413 makes four changes to tax law:
Allows taxpayers to use motion picture production
tax credits to reduce tentative minimum tax,
Applies the current "streamlined" process whereby
501(c)(3)s may obtain tax exempt status by supplying
FTB with the IRS determination to 501(c)(4)s,
501(c)(5)s, 501(c)(6)s, and 501(c)(7)s.
Provides that FTB may revoke tax-exempt status for
any 501(c) corporation that is suspended or forfeited,
Requires any 501(c) corporation that has its
tax-exempt status suspended or revoked by IRS to
notify FTB.
The measure also makes conforming changes.
State Revenue Impact
According to FTB, AB 1413 results in revenue losses of $9.3
million in 2012-13, $800,000 in 2013-14, $1.3 million in
2014-15, revenue gain of $10,000 in 2015-16, and a revenue
loss of $600,000 in 2015-16. The revenue effects are
almost wholly attributable to the change in the TMT
treatment of the motion picture production tax credit, and
are offset by future gains as taxpayers who pay less AMT
generate less AMT credits that they can apply in future
taxable years. FTB estimates the measure's nonprofit
organization changes result in revenue losses of $10,000 or
less annually.
Comments
1. Purpose of the bill . AB 1413 is the Assembly Committee
on Revenue and Taxation's annual omnibus bill to make
technical changes to the Personal Income Tax and
Corporation Tax Law. Both items represent noncontroversial
AB 1413 - 3/19/13 -- Page 4
changes in law that should help clarify issues for both
taxpayers and FTB alike.
Assembly Actions
Ass Arts, Entertainment, Sports, Tourism, and Internet
Media 9 -0
Assembly Revenue & Taxation 8-0
Assembly Appropriations 17-0
Assembly Floor 76-0
Support and Opposition (6/27/13)
Support : California Teamsters Public Affairs Council,
Directors Guild of America, International Alliance of
Theatrical Stage Employees, International Brotherhood of
Teamsters, Local 399, Laborers' International Union of
North America, Local 724 Professional Musicians Local 47,
Recording Musicians Association, SAG-AFTRA
Opposition : Unknown.