BILL ANALYSIS Ó AB 2544 Page 1 Date of Hearing: May 18, 2016 ASSEMBLY COMMITTEE ON APPROPRIATIONS Lorena Gonzalez, Chair AB 2544 (Travis Allen) - As Amended May 12, 2016 ----------------------------------------------------------------- |Policy |Revenue and Taxation |Vote:|9 - 0 | |Committee: | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | ----------------------------------------------------------------- Urgency: No State Mandated Local Program: NoReimbursable: No SUMMARY: This bill creates the Access to Angel Investors Act and provides certain limited liability companies (LLCs) an exemption from the annual LLC tax, equal to the minimum franchise tax (MFT), and the associated annual fees. For taxable years beginning before AB 2544 Page 2 January 1, 2020, an LLC is exempt from these taxes and fees if they are a qualified investment partnership (QIP), which is an LLC that meets the following requirements: 1)It is classified as a partnership for California income tax purposes. 2)No less than 90% of the costs of its total assets consist of qualifying investment securities, deposits at banks or other financial institutions, interest or investments in a partnership, or office space and equipment reasonably necessary to carry on its activities as a QIP. 3)No less than 90% of its gross income consists of interest, dividends, and gains from the sale or exchange of qualified investment securities or investments in a partnership. FISCAL EFFECT: Annual GF revenue loss of $1.7 million, $1.8 million, and $1.9 million in FY 2016-17, FY 2017-18, and FY 2018-19, respectively. COMMENTS: 1)Background on minimum franchise tax and fees. Existing law imposes a franchise tax on all corporations doing business in California equal to 8.84% of its taxable income. The minimum franchise tax (MFT) is $800, no matter what the taxable income is. Existing law also requires a limited partnership (LP), a limited liability partnership (LLP), or a LLC to pay an annual tax equal to the MFT for the privilege of doing business in AB 2544 Page 3 California. These entities (known as "pass-through entities") are not subject to any tax based on taxable income because the income is passed through to the owners. The MFT was enacted to ensure that all corporations, LPs, LLPs, and LLCs pay at least a minimum amount of tax for the privilege of conducting business in California, regardless of the business's income or losses. Thus, the tax is not an income tax but rather it is a tax on the right to exercise the powers granted to a corporation conducting business in California. Even when a business earns no income, it still receives the benefits of its corporate status, including the limited liability protection under this state. LLCs also pay an annual fee based on the total income. This fee ranges from $900 for an LLC with a total income between $250,000 and $499,999 to $11,790 for an LLC with a total income in excess of $5 million. 2)Purpose. This bill aims to incentivize the creation of QIPs in California. According to the author, an effective way for a startup to accept capital from smaller accredited investors is to pool the investors into a QIP that invests only in that startup. The QIP makes the startup more attractive to investors who can now defer to the partnership manager on major decisions rather than constantly getting involved in the business of a startup. According to the author, a QIP is not a traditional businesses, and the MFT prevents them from forming. Analysis Prepared by:Luke Reidenbach / APPR. / (916) 319-2081 AB 2544 Page 4