BILL ANALYSIS Ó
AB 2625
Page 1
Date of Hearing: May 25, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
AB
2625 (Lopez) - As Amended May 17, 2016
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|Policy |Revenue and Taxation |Vote:| 9 - 0 |
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Urgency: Yes State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill, for taxable years starting on January 1, 2017, and
ending before January 1, 2020, reduces the minimum franchise tax
(MFT), or the annual tax equal to the MFT, that new
microbusinesses must pay. Specifically, this bill:
1)Reduces the annual tax equal to the MFT for qualified new
microbusinesses as follows:
a) $200 for a new microbusiness with gross receipts, less
AB 2625
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returns and allowances, derived from or attributable to
this state of $50,000 or less;
b) $400 for a new microbusiness with gross receipts, less
returns and allowances, derived from or attributable to
this state of $50,000 to $100,000; or,
c) $600 for a new microbusiness with gross receipts, less
returns and allowances, derived from or attributable to
this state of $100,000 to $150,000.
1)Specifies that a corporation that is a new microbusiness can
pay the reduced annual tax on the second through fourth year
of existence if any of those years are between January 1, 2017
and January 1, 2020.
2)Specifies that a LP, LLP, and LLC that is a new microbusiness
can pay the reduced annual tax for the first five years of its
existence if any of those years are between January 1, 2017
and January 2, 2020. .
3)Provides that if a corporation or LLC's reasonably estimated
gross receipts exceed the amount that qualifies it for a
reduction in MFT or annual tax, an additional tax in the
amount of the reduction for that taxable year must be paid on
the due date of its return.
FISCAL EFFECT:
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Annual GF revenue loss of $13 million, $55 million, and $110
million in FY 2016-17, FY 2017-18, and FY 2018-19, respectively.
COMMENTS:
1)Purpose. According to the author, AB 2625, this bill will
encourage small business and micro-businesses to incorporate
in California, and the sponsor of the bill, CalSmallBiz,
argues this bill will help level the playing field for smaller
businesses who are harmed by California's corporate filing
fee.
2)Background. 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 California. These
entities (known as "pass-through entities") are not subject to
any tax based on taxable income because income is passed
through to the owners.
The MFT was enacted to ensure that all corporations, LPs,
LLPs, and LLs 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
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$250,000 and $499,999 to $11,790 for an LLC with a total
income in excess of $5 million.
3)The MFT is not necessarily a bad deal. New microbusinesses
that believe the $800 MFT or annual tax is too costly have the
option of doing business as a sole proprietor or general
partnership, which do not pay the tax. However, under such
arrangements, business owners could be held personally liable
by aggrieved customers and for the actions of other partners.
Analysis Prepared by:Luke Reidenbach / APPR. / (916)
319-2081