BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 1775 |Hearing |6/15/16 |
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|Author: |Obernolte |Tax Levy: |No |
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|Version: |4/13/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Income taxes: returns: due dates
Conforms tax return deadlines for business to recent changes in
federal law.
Background
California law does not automatically conform to changes to
federal tax law, except for specific retirement provisions.
Instead, the Legislature must affirmatively conform to federal
changes. Conformity legislation is introduced either as
individual tax bills to conform to specific federal changes,
like the Mortgage Debt Forgiveness Relief Act (AB 1393, Perea,
2014), or as one omnibus bill that provides that state law
conforms to federal law as of a specified date, currently
January 1, 2015 (AB 154, Ting, 2010).
Business owners can choose between several different entity
types established in federal and state law, with varying tax
rates, liability protections, and shareholder structures;
however, simply put, a business can be a partnership, a
corporation, or a Limited Liability Corporation (LLC). Unlike
corporations and LLCs, partnerships do not protect their owners
from legal liability arising from the business's activities such
as contract debt and tort liability, but also do not generally
pay tax on profits at the business entity level. Instead, taxes
apply to profits when they "pass through" to owners. In
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contrast, owners of corporations do have liability protections,
but may be subject to tax at the business entity level depending
on its corporation type. Additionally, California often taxes
corporations and LLCs differently than federal law:
"C" corporations are subject to tax at the corporate
level under federal law, and whose declared dividends are
also subsequently taxable to shareholders. California
applies an 8.84% franchise tax on a C Corporations, and
taxes shareholders' dividends as ordinary income.
"S" corporations pass through all income and losses to
shareholders, and are treated as partnerships for federal
tax purposes, so they do not pay federal tax at the entity
level. However, since California first conformed to
federal subchapter S provisions in 1987, the state applies
an entity-level tax (currently 1.5%), in addition to taxing
shareholders on net income derived from an S corporation.
LLCs can be partnerships, corporations, or disregarded
entities under federal law, depending on its facts and
circumstances. A disregarded entity is an LLC that is
owned by a single member and passes through all income,
loss, deductions, and credits of the disregarded entity to
the single member's tax return. The single owner can be an
individual taxpayer, or any of the business entity forms
listed above, and its owner must file a return for the
disregarded entity along with its own. While tax-free
entities at the federal level, LLCs doing business in
California pay an annual fee based on its total income from
all sources reportable to this state for the taxable year.
Additionally, for all of the above corporations that derive
little or no profits, California applies a "minimum franchise
tax," except in specified circumstances.
Federal law generally requires taxpayers to file income tax
returns on or before the 15th day of the fourth month following
the end of the taxable year. Until recently, a partnership must
also file its federal income tax return on the same date after
the end of the partnership taxable year. For a partnership with
a taxable year that is a calendar year, that date is April 15th,
but a partnership is allowed an automatic five-month extension
if it files the correct form. Additionally, until recently,
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federal law required a C or S corporation to file its federal
income tax return on or before the 15th day of the third month
following the close of the corporation's taxable year, or March
15th for a corporation with a taxable year that is a calendar
year. Corporations can also get an automatic six-month extension
by submitting the correct form.
California conforms to these deadlines for the most part;
however, LLCs treated as corporations must file its return on or
before the 15th day of the third month following the close of
the corporation's taxable year, or March 15th for a corporation
with a taxable year that is a calendar year, while LLCs treated
as partnerships or disregarded entities have a deadline of on or
before the 15th day of the fourth month after the end of the
taxable year.
In July, 2015, Congress enacted and President Obama signed the
Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015, which shortened the due date for
partnership returns by one month, and extended the due date for
C corporation returns by one month, to ensure that the filing
deadline for partnerships would precede the due dates of their
individual and corporate investors. Taxpayer groups and tax
practitioners want to conform state filing deadlines to these
recent federal changes.
Proposed Law
Assembly Bill 1775 changes the state's filing deadlines for
business taxpayers to conform to changes made in the Surface
Transportation and Veterans Health Care Choice Improvement Act
of 2015, commencing in the January 1, 2016 taxable year.
Specifically, the bill:
Changes the deadline for "C" corporations to file its
return from the fifteenth day of the third month following
the close of the taxable year to the fourth month following
the close of the taxable year.
The bill maintains this current deadline for "S"
corporations or LLCs classified as a corporations,
consistent with federal law.
Changes the deadline for partnerships, or LLCs filing as
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partnerships from the fifteenth day of the third month
following the close of the taxable year to the fourth month
following the close of the taxable year.
Provides that the filing deadline for LLCs as
disregarded entities is the same as its owner, except for
those owned by "S" corporations, in which case the deadline
would be the same as that corporation, or the 15th day of
the third month.
State Revenue Impact
Franchise Tax Board states that AB 1775 does not impact state
revenues.
Comments
1. Purpose of the bill . According to the author, "A recent
change to federal tax laws modified the due dates for several
common federal returns. The new federal due dates are designed
to provide a more logical flow of information for a more
efficient tax preparation process that reduced the number of
estimates, extensions, and amended returns. Due to these
changes at the federal level, many due dates for similar tax
filings in California no longer conform to federal law. This
discrepancy complicates the process for many of the state's
taxpayers and businesses that will need to comply with multiple
tax deadlines for the same returns. The complexity increases
the potential for taxpayer errors or inadvertent non-compliance,
which could result in costly penalties for a number of
Californians. AB 1775 would update California's due dates for
LLCs and C corporations to make them consistent with federal law
for taxable years beginning on or after January 1, 2016:
LLC return due dates would move to March 15 (current
state law is April 15)
C corporation return due dates would move to April 15
(current state law is March 15)"
2. Single issue conformity . Changes to return filing deadlines
would usually be one part of a general conformity bill, which
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updates many sections of the Revenue and Taxation Code to
reflect changes made by Congress to the Internal Revenue Code.
While the Legislature enacted a general conformity bill last
year, it was the first one since 2010, and no such bill has yet
been introduced this year. By making these changes, AB 1775
eliminates the potential risk that businesses and tax
practitioners could potentially miss important deadlines next
year resulting from potentially confusing dual deadlines for
federal and state taxes.
Assembly Actions
Assembly Revenue and Taxation 9-0
Assembly Appropriations 19-0
Assembly Floor 79-0
Support and
Opposition (6/9/16)
Support : California Society of Certified Professional
Accountants, California Taxpayers Association
Opposition : None received.
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