BILL ANALYSIS Ó
AB 2544
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Date of Hearing: May 18, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
AB
2544 (Travis Allen) - As Amended May 12, 2016
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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
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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
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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
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