BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 1413 (Revenue and Taxation Committee) - Corporation Tax Law:
Tentative Minimum Tax: Credits and Exempt Organizations
Amended: As Introduced Policy Vote: G&F 7-0
Urgency: No Mandate: No
Hearing Date: August 12, 2013
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 1413 would clarify the scope of the California
Motion Picture Tax Credit utilization and simplify the process
by which certain nonprofit organizations may obtain tax-exempt
status in California. Specifically, this bill would:
Allow the California Motion Picture and Television
Production Credit ("Motion Picture Credit") to reduce a
corporate taxpayer's tax below tentative minimum tax.
Eliminate the requirements for certain federally
tax-exempt entities to apply for a California income tax
exemption.
Declare that the retroactive application of amendments
made to the provisions relating to the film tax credit
serves a public purpose for specified reasons and does not
constitute a gift of public funds within the meaning of
Section 6 of Article XVI of the California Constitution.
Fiscal Impact: The Franchise Tax Board (FTB) indicates that the
provision simplying the process for certain nonprofit
organizations to obtain tax-exempt status in California would
result in an annual General Fund revenue loss of $9,000 in
2014-15, and $20,000 annually thereafter. This provision would
not significantly impact FTB's costs.
FTB indicates that clarifying the scope of the film tax credit
utilization would result in an annual General Fund revenue loss
of $9.3 million in 2012-13, $800,000 in 2013-14, $1.3 million in
2014-15, and $600,000 in 2016-17, and would result in a General
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Fund revenue gain of $10,000 in FY 2015-16. The revenue effects
are almost entirely 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.
The department's administrative costs would increase by an as
yet unidentified amount.
Background: In 2009, the California Film & Television Tax Credit
Program (Film Tax Credit Program) was enacted to grant a credit
to taxpayers producing motion pictures. The film 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.
The enabling legislation, however, did not expressly add the
film tax credit to the list of tax credits that may be used to
reduce a corporate taxpayer's regular tax beyond the tentative
minimum tax (TMT) which is California's version of the
alternative minimum tax. This language is routinely included in
over almost all of the tax credits claimed by California
corporations. As a result, the film tax credit may be used to
reduce regular tax liability but only to the TMT level, which
prevents the taxpayer from realizing the full value of the
credit. In many cases, the credit is limited to about 25% of
the amount awarded. Because the use of the film tax credit is
similarly limited in future years, even carried over credits may
not be fully utilized.
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.
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Generally, taxpayers can't use some credits to reduce TMT;
however, the Legislature has allowed some credits to do so, 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.
Tax law has provided for different treatment of 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
Under current law, 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 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. FTB
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then notifies the organization of its determination, or its
acknowledgement of the IRS 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: This bill would do the following:
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
Related Legislation:
AB 404 (Eng, Chapter 504, Statutes of 2009) eliminated
the requirements for certain tax-exempt entities that are
granted a federal group exemption to apply separately for
state tax exemption, and allowed the FTB to permit
inspection of certain exemption documents.
AB 897 (Houston, Chapter 238, Statutes of 2007)
eliminated the state requirement for filing a separate
application process for certain organizations that receive
federal tax-exempt recognition. The organization seeking
tax exemption must, however, submit to the FTB its IRS
determination letter and be an organization described under
IRC section 501(c)(3).
AB 2026 (Fuentes, Chapter 841, Statutes of 2012)
extended the operation of the California Motion Picture Tax
Credit (Film Tax Credit) for two years, thereby authorizing
the allocation of an additional $100 million annually in
tax credits to qualified productions from July 1, 2015,
until July 1, 2017.
Staff Comments: This measure represents the Assembly Revenue and
Taxation Committee's annual omnibus bill to make technical
changes to the Personal Income Tax Law and the Corporation Tax
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Law. Its provisions are designed to provide clarity to both FTB
and taxpayers.