BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 641 HEARING: 4/10/13
AUTHOR: Anderson FISCAL: Yes
VERSION: 2/22/13 TAX LEVY: Yes
CONSULTANT: Grinnell
MINIMUM FRANCHISE TAX FOR NEW BUSINESSES
Exempts specified corporations from the minimum franchise
tax for the first four years.
Background and Existing Law
Corporations with taxable nexus in California must pay
either the minimum franchise tax of $800, or the measured
franchise tax of 8.84% of apportioned net income if the tax
exceeds $800. The minimum franchise tax ensures that
corporations that do not show a profit in a taxable year
bear some of the cost of public services. The tax does not
usually apply to most "pass-through entities," where income
and expenses pass through the business entity and are
reported on the entity's owners' personal income taxes,
such as limited partnerships, and limited liability
companies not classified as corporations.
The Legislature has exempted corporations, either generally
or specifically, from the minimum franchise tax: In 1999,
the Legislature exempted every corporation that
incorporates or qualifies to do business in the state on or
after January 1, 2000 from the minimum franchise tax in its
first taxable year (AB 10, Correa, 1998), following up on a
partial reduction enacted the previous year (AB 2798,
Machado, 1998). The Legislature specifically excluded
corporations that form solely to avoid paying the minimum
franchise tax from the reduction. The Legislature also
exempted from the tax until 2018 corporations owned by a
deployed member of the United States Armed Forces with less
than $250,000 in apportioned income in a taxable year when
it either ceases operation or operates at a loss (AB 2671,
Cook, 2010).
Proposed Law
SB 641 (Anderson) - 2/22/11 -- Page 2
Senate Bill 641 exempts from the minimum franchise tax for
its first four taxable years a corporation:
That incorporates or becomes qualified to transact
intrastate business in California,
Begins business operations at or after the time of
its incorporation,
Reasonably estimates that its gross receipts
apportioned to California, as defined, are less than
$10,000 for the next taxable year.
State Revenue Impact
According to the Franchise Tax Board (FTB), SB 641 results
in revenue losses of $65 million in 2013-14, $70 million in
2014-15, 2015-16, and 2016-17, and $65 million in 2017-18.
Comments
1. Purpose of the bill . According to the author, "This
bill is an effort to show support for small and
micro-businesses that are newly formed and struggling
financially. These are typically one person enterprises
run by people who are passionate about what they do, but
are overwhelmed by startup costs and other expenses. SB
641 will allow struggling new corporations to reinvest in
the future of their enterprise by exempting them from the
minimum franchise tax. This relief only applies if they
make less than $10,000 in annual gross receipts and are
within the first four years of taxable income. Nearly 25%
of all new businesses fail within the first year and 50%
have failed by the fourth year. By providing some relief
to the smallest and most disadvantaged new businesses, some
of these struggling ventures may survive and provide needed
economic activity in the State of California."
2. Tradeoffs . While reducing taxes on small businesses,
SB 641 will result in revenue losses, and will not likely
result in any additional economic growth or employment that
exceed other potential uses of the same revenue. SB 641
would simply absolve businesses forming or commencing doing
business in the state of four years of the $800 minimum
tax, for a maximum benefit of $3200. Leaving aside the
lack of evidence for a connection between a reduction in
SB 641 (Anderson) - 2/22/11 -- Page 3
state taxes and economic or employment growth, will $800
per year make that much difference for a business?
Individuals starting firms will see a benefit under SB 641,
and will have $800 more in capital to invest in operations,
but even the smallest businesses don't live or die because
of an $800 minimum franchise tax bill. Additionally, the
minimum tax ensures that all corporations bear some of the
cost of the public services necessary for a business to
succeed, such as an educated workforce, transportation
infrastructure, and public safety, among others. The
Committee may wish to consider whether the foregone revenue
resulting from SB 641's kind gesture to newly forming
businesses is worth the tradeoff of cuts in spending or
taxes on other activities that it necessitates.
3. Technicals . Committee staff recommends the following
amendments:
Clarify that the corporation must have incorporated
on or commenced doing business on or after the
effective date of the bill,
Clarify that businesses that were not previously
operating as corporations, but become corporations, or
a corporation not currently in California that acquire
a California corporation, do not enjoy the bill's tax
reduction,
Clarify that the corporation must expect to
generate less than $10,000 in gross receipts in each
taxable year for which the minimum tax is absolved,
Resolve cross-referencing errors.
Support and Opposition (4/4/13)
Support : California Chamber of Commerce, Southwest
California Legislative Council
Opposition : None received.