Amended in Assembly May 2, 2016

Amended in Assembly March 28, 2016

California Legislature—2015–16 Regular Session

Assembly BillNo. 2807


Introduced by Assembly Memberbegin delete Mayesend deletebegin insert Steinorthend insert

(Coauthor: Assembly Member Lackey)

February 19, 2016


An act to amend Sectionbegin delete 23153end deletebegin insert 17052end insert of the Revenue and Taxation Code, relating tobegin delete taxation, to take effect immediately, tax levy.end deletebegin insert taxationend insertbegin insert, and making an appropriation therefor.end insert

LEGISLATIVE COUNSEL’S DIGEST

AB 2807, as amended, begin deleteMayesend delete begin insertSteinorthend insert. begin deleteIncome taxes: minimum franchise tax: annual tax. end deletebegin insertPersonal income taxes: earned income credit.end insert

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The Personal Income Tax Law allows various credits against the taxes imposed by that law, including certain credits that are allowed in modified conformity to credits allowed by federal income tax laws. Federal income tax laws allow a refundable earned income tax credit for certain low-income individuals who have earned income from wages, salaries, tips, and other employee compensation plus net earnings from self-employment and who meet certain other requirements. The Personal Income Tax Law, for taxable years beginning on or after January 1, 2015, in modified conformity with federal income tax laws, allows an earned income credit against personal income tax, which is only for earned income from wages, salaries, tips, and other employee compensation, and a payment in excess of that credit amount, to an eligible individual that is equal to that portion of the earned income tax credit allowed by federal law as determined by the earned income tax credit adjustment factor as set forth in the annual Budget Act.

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This bill would, for taxable years beginning on and after January 1, 2016, expand the earned income credit allowed by the Personal Income Tax Law by providing additional conformity with federal income tax law to include specified net earnings from self-employment in earned income thus allowing an earned income credit for taxpayers for those earnings.

end insert
begin insert

Existing law establishes the continuously appropriated Tax Relief and Refund Account and provides that payments required to be made to taxpayers or other persons from the Personal Income Tax Fund are to be paid from that account, including any amount allowable as an earned income credit in excess of any tax liabilities.

end insert
begin insert

By authorizing new payments from that account for additional amounts in excess of personal income tax liabilities, this bill would make an appropriation.

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Existing law imposes an annual minimum franchise tax, except as provided, on every corporation incorporated in this state, qualified to transact intrastate business in this state, or doing business in this state. Existing law, until taxable years beginning on or after January 1, 2018, exempts a corporation and a limited liability company that are small businesses solely owned by a deployed member of the United States Armed Forces, as specified, from paying the minimum franchise tax, or the annual tax, for the privilege of doing business in this state if the corporation or limited liability company ceases operation or operates at a loss, as defined.

end delete
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The bill would reduce the annual minimum franchise tax to $150 for taxable years beginning on or after January 1, 2017, for specified corporations. This bill would also extend the exemption for corporations and limited liability companies solely owned by deployed members of the United States Armed Forces until January 1, 2020.

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This bill would take effect immediately as a tax levy.

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Vote: begin deletemajority end deletebegin insert23end insert. Appropriation: begin deleteno end deletebegin insertyesend insert. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

P2    1begin insert

begin insertSECTION 1.end insert  

end insert

begin insertSection 17052 of the end insertbegin insertRevenue and Taxation Codeend insert
2
begin insert is amended to read:end insert

P3    1

17052.  

(a) (1) For each taxable year beginning on or after
2January 1, 2015, there shall be allowed against the “net tax,” as
3defined by Section 17039, an earned income tax credit in an amount
4equal to an amount determined in accordance with Section 32 of
5the Internal Revenue Code, relating to earned income, as applicable
6for federal income tax purposes for the taxable year, except as
7otherwise provided in this section.

8(2) (A) The amount of the credit determined under Section 32
9of the Internal Revenue Code, relating to earned income, as
10modified by this section, shall be multiplied by the earned income
11tax credit adjustment factor for the taxable year.

12(B) Unless otherwise specified in the annual Budget Act, the
13earned income tax credit adjustment factor for a taxable year
14beginning on or after January 1, 2015, shall be 0 percent.

15(C) The earned income tax credit authorized by this section
16shall only be operative for taxable years for which resources are
17authorized in the annual Budget Act for the Franchise Tax Board
18to oversee and audit returns associated with the credit.

19(b) (1) In lieu of the table prescribed in Section 32(b)(1) of the
20Internal Revenue Code, relating to percentages, the credit
21percentage and the phaseout percentage shall be determined as
22follows:


23

 

In the case of an eligible individual with:

The credit percentage is:

The phaseout percentage is:

No qualifying children

7.65%

7.65%

1 qualifying child

34%

34%

2 or more qualifying children

40%

40%

P3   2933P3   39

 

30(2) (A) In lieu of the table prescribed in Section 32(b)(2)(A)
31of the Internal Revenue Code, the earned income amount and the
32phaseout amount shall be determined as follows:

 

In the case of an eligible individual with:

The earned income amount is:

The phaseout amount is:

No qualifying children

$3,290

$3,290

1 qualifying child

$4,940

$4,940

2 or more qualifying children

$6,935

$6,935

P3   39

 

P4    1(B) Section 32(b)(2)(B) of the Internal Revenue Code, relating
2to joint returns, shall not apply.

3(3) Section 32(b)(3)(A) of the Internal Revenue Code, relating
4to increased percentage for three or more qualifying children, is
5modified by substituting “the credit percentage and phaseout
6percentage is 45 percent” for “the credit percentage is 45 percent.”

7(c) (1) Section 32(c)(1)(A)(ii)(I) of the Internal Revenue Code
8is modified by substituting “this state” for “the United States.”

9(2) Section 32(c)(2)(A) of the Internal Revenue Code is modified
10as follows:

11(A) Section 32(c)(2)(A)(i) of the Internal Revenue Code is
12modified by deleting “plus” and inserting in lieu thereof the
13following: “and only if such amounts are subject to withholding
14pursuant to Division 6 (commencing with Section 13000) of the
15Unemployment Insurancebegin delete Code.”end deletebegin insert Code, plusend insertbegin insertend insert

16(B) begin insertIn lieu of end insertSection 32(c)(2)(A)(ii) of the Internal Revenue
17
begin delete Code shall not apply.end deletebegin insert Code, substitute the following: “the amount
18of the taxpayer’s reportable gross income from self-employment
19for the taxable year.” For purposes of this section, “reportable
20gross income from self-employment” means gross income derived
21by an individual from any trade or business carried on by such
22individual that is properly reported to the Secretary on an
23information return for the taxable year and reported on a written
24statement furnished to that individual as required pursuant to
25Section 6041 of the Internal Revenue Code, relating to information
26at source, or Section 6041A of the Internal Revenue Code, relating
27to returns regarding payments of remuneration for services and
28direct sales. end insert

29(3) Section 32(c)(3)(C) of the Internal Revenue Code, relating
30to place of abode, is modified by substituting “this state” for “the
31United States.”

32(d) Section 32(i)(1) of the Internal Revenue Code is modified
33by substituting “$3,400” for “$2,200.”

34(e) In lieu of Section 32(j) of the Internal Revenue Code, relating
35to inflation adjustments, for taxable years beginning on or after
36January 1, 2016, the amounts specified in paragraph (2) of
37subdivision (b) and in subdivision (d) shall be recomputed annually
38in the same manner as the recomputation of income tax brackets
39under subdivision (h) of Section 17041.

P5    1(f) If the amount allowable as a credit under this section exceeds
2the tax liability computed under this part for the taxable year, the
3excess shall be credited against other amounts due, if any, and the
4balance, if any, shall be paid from the Tax Relief and Refund
5Account and refunded to the taxpayer.

6(g) The Franchise Tax Board may prescribe rules, guidelines,
7or procedures necessary or appropriate to carry out the purposes
8of this section. Chapter 3.5 (commencing with Section 11340) of
9Part 1 of Division 3 of Title 2 of the Government Code shall not
10apply to any rule, guideline, or procedure prescribed by the
11Franchise Tax Board pursuant to this section.

12(h) Notwithstanding any other law, amounts refunded pursuant
13to this section shall be treated in the same manner as the federal
14earned income refund for the purpose of determining eligibility to
15receive benefits under Division 9 (commencing with Section
1610000) of the Welfare and Institutions Code or amounts of those
17benefits.

18(i) (1) For the purpose of implementing the credit allowed by
19this section for the 2015 taxable year, the Franchise Tax Board
20shall be exempt from the following:

21(A) Special Project Report requirements under State
22Administrative Manual Sections 4819.36, 4945, and 4945.2.

23(B) Special Project Report requirements under Statewide
24Information Management Manual Section 30.

25(C) Section 11.00 of the 2015 Budget Act.

26(D) Sections 12101, 12101.5, 12102, and 12102.1 of the Public
27Contract Code.

28(2) The Franchise Tax Board shall formally incorporate the
29scope, costs, and schedule changes associated with the
30implementation of the credit allowed by this section in its next
31anticipated Special Project Report for its Enterprise Data to
32Revenue Project.

33(j) (1) In accordance with Section 41 of the Revenue and
34Taxation Code, the purpose of the California Earned Income Tax
35Credit is to reduce poverty among California’s poorest working
36families and individuals. To measure whether the credit achieves
37its intended purpose, the Franchise Tax Board shall annually
38prepare a written report on the following:

39(A) The number of tax returns claiming the credit.

P6    1(B) The number of individuals represented on tax returns
2claiming the credit.

3(C) The average credit amount on tax returns claiming the credit.

4(D) The distribution of credits by number of dependents and
5income ranges. The income ranges shall encompass the phase-in
6and phaseout ranges of the credit.

7(E) Using data from tax returns claiming the credit, including
8an estimate of the federal tax credit determined under Section 32
9of the Internal Revenue Code, an estimate of the number of families
10who are lifted out of deep poverty by the credit and an estimate of
11the number of families who are lifted out of deep poverty by the
12combination of the credit and the federal tax credit. For the
13purposes of this subdivision, a family is in “deep poverty” if the
14income of the family is less than 50 percent of the federal poverty
15threshold.

16(2) The Franchise Tax Board shall provide the written report to
17the Senate Committee on Budget and Fiscal Review, the Assembly
18Committee on Budget, the Senate and Assembly Committees on
19Appropriations, the Senate Committee on Governance and Finance,
20the Assembly Committees on Revenue and Taxation, and the
21Senate and Assembly Committees on Human Services.

22(k) The tax credit allowed by this section shall be known as the
23 California Earned Income Tax Credit.

begin insert

24
(l) The amendments made to this section by the act adding this
25subdivision shall apply for taxable years beginning on or after
26January 1, 2016.

end insert
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27

SECTION 1.  

Section 23153 of the Revenue and Taxation Code
28 is amended to read:

29

23153.  

(a) Every corporation described in subdivision (b) shall
30be subject to the minimum franchise tax specified in subdivision
31(d) from the earlier of the date of incorporation, qualification, or
32commencing to do business within this state, until the effective
33date of dissolution or withdrawal as provided in Section 23331 or,
34if later, the date the corporation ceases to do business within the
35limits of this state.

36(b) Unless expressly exempted by this part or the California
37Constitution, subdivision (a) shall apply to each of the following:

38(1) Every corporation that is incorporated under the laws of this
39state.

P7    1(2) Every corporation that is qualified to transact intrastate
2business in this state pursuant to Chapter 21 (commencing with
3Section 2100) of Division 1 of Title 1 of the Corporations Code.

4(3) Every corporation that is doing business in this state.

5(c) The following entities are not subject to the minimum
6franchise tax specified in this section:

7(1) Credit unions.

8(2) Nonprofit cooperative associations organized pursuant to
9Chapter 1 (commencing with Section 54001) of Division 20 of the
10Food and Agricultural Code that have been issued the certificate
11of the board of supervisors prepared pursuant to Section 54042 of
12the Food and Agricultural Code. The association shall be exempt
13from the minimum franchise tax for five consecutive taxable years,
14commencing with the first taxable year for which the certificate
15is issued pursuant to subdivision (b) of Section 54042 of the Food
16and Agricultural Code. This paragraph only applies to nonprofit
17cooperative associations organized on or after January 1, 1994.

18(d) (1) Except as provided in paragraph (2), paragraph (1) of
19subdivision (f) of Section 23151, paragraph (1) of subdivision (f)
20of Section 23181, and paragraph (1) of subdivision (c) of Section
2123183, corporations subject to the minimum franchise tax shall
22pay annually to the state a minimum franchise tax of eight hundred
23dollars ($800).

24(2) The minimum franchise tax shall be twenty-five dollars
25($25) for each of the following:

26(A) A corporation formed under the laws of this state whose
27principal business when formed was gold mining, which is inactive
28and has not done business within the limits of the state since 1950.

29(B) A corporation formed under the laws of this state whose
30principal business when formed was quicksilver mining, which is
31inactive and has not done business within the limits of the state
32since 1971, or has been inactive for a period of 24 consecutive
33months or more.

34(3) For purposes of paragraph (2), a corporation shall not be
35considered to have done business if it engages in business other
36than mining.

37(e) Notwithstanding subdivision (a), for taxable years beginning
38on or after January 1, 1999, and before January 1, 2000, every
39“qualified new corporation” shall pay annually to the state a
40minimum franchise tax of five hundred dollars ($500) for the
P8    1second taxable year. This subdivision shall apply to any corporation
2that is a qualified new corporation and is incorporated on or after
3January 1, 1999, and before January 1, 2000.

4(1) The determination of the gross receipts of a corporation, for
5purposes of this subdivision, shall be made by including the gross
6receipts of each member of the commonly controlled group, as
7defined in Section 25105, of which the corporation is a member.

8(2) “Gross receipts, less returns and allowances reportable to
9this state,” means the sum of the gross receipts from the production
10of business income, as defined in subdivision (a) of Section 25120,
11and the gross receipts from the production of nonbusiness income,
12as defined in subdivision (d) of Section 25120.

13(3) “Qualified new corporation” means a corporation that is
14incorporated under the laws of this state or has qualified to transact
15intrastate business in this state, that begins business operations at
16or after the time of its incorporation and that reasonably estimates
17that it will have gross receipts, less returns and allowances,
18reportable to this state for the taxable year of one million dollars
19($1,000,000) or less. “Qualified new corporation” does not include
20any corporation that began business operations as a sole
21proprietorship, a partnership, or any other form of business entity
22prior to its incorporation. This subdivision shall not apply to any
23corporation that reorganizes solely for the purpose of reducing its
24minimum franchise tax.

25(4) This subdivision shall not apply to limited partnerships, as
26defined in Section 17935, limited liability companies, as defined
27in Section 17941, limited liability partnerships, as described in
28Section 17948, charitable organizations, as described in Section
2923703, regulated investment companies, as defined in Section 851
30of the Internal Revenue Code, relating to definition of regulated
31investment company, real estate investment trusts, as defined in
32Section 856 of the Internal Revenue Code, relating to definition
33of real estate investment trust, real estate mortgage investment
34conduits, as defined in Section 860D of the Internal Revenue Code,
35relating to REMIC defined, qualified Subchapter S subsidiaries,
36as defined in Section 1361(b)(3) of the Internal Revenue Code,
37relating to treatment of wholly owned subsidiaries, or to the
38formation of any subsidiary corporation, to the extent applicable.

39(5) For any taxable year beginning on or after January 1, 1999,
40and before January 1, 2000, if a corporation has qualified to pay
P9    1five hundred dollars ($500) for the second taxable year under this
2subdivision, but in its second taxable year, the corporation’s gross
3receipts, as determined under paragraphs (1) and (2), exceed one
4million dollars ($1,000,000), an additional tax in the amount equal
5to three hundred dollars ($300) for the second taxable year shall
6be due and payable by the corporation on the due date of its return,
7without regard to extension, for that year.

8(f) (1) Notwithstanding subdivision (a), every corporation that
9incorporates or qualifies to do business in this state on or after
10January 1, 2000, shall not be subject to the minimum franchise tax
11for its first taxable year.

12(2) This subdivision shall not apply to limited partnerships, as
13defined in Section 17935, limited liability companies, as defined
14in Section 17941, limited liability partnerships, as described in
15Section 17948, charitable organizations, as described in Section
1623703, regulated investment companies, as defined in Section 851
17of the Internal Revenue Code, relating to definition of regulated
18investment company, real estate investment trusts, as defined in
19Section 856 of the Internal Revenue Code, relating to definition
20of real estate investment trust, real estate mortgage investment
21conduits, as defined in Section 860D of the Internal Revenue Code,
22relating to REMIC defined, and qualified Subchapter S subsidiaries,
23as defined in Section 1361(b)(3) of the Internal Revenue Code,
24relating to treatment of wholly owned subsidiaries, to the extent
25applicable.

26(3) This subdivision shall not apply to any corporation that
27reorganizes solely for the purpose of avoiding payment of its
28minimum franchise tax.

29(g) Notwithstanding subdivision (a), a domestic corporation, as
30defined in Section 167 of the Corporations Code, that files a
31certificate of dissolution in the office of the Secretary of State
32pursuant to subdivision (b) of Section 1905 of the Corporations
33Code, prior to its amendment by the act amending this subdivision,
34and that does not thereafter do business shall not be subject to the
35minimum franchise tax for taxable years beginning on or after the
36date of that filing.

37(h) The minimum franchise tax imposed by paragraph (1) of
38subdivision (d) shall not be increased by the Legislature by more
39than 10 percent during any calendar year.

P10   1(i) (1) Notwithstanding subdivision (a), a corporation that is a
2small business solely owned by a deployed member of the United
3States Armed Forces shall not be subject to the minimum franchise
4tax for any taxable year the owner is deployed and the corporation
5operates at a loss or ceases operation.

6(2) The Franchise Tax Board may promulgate regulations as
7necessary or appropriate to carry out the purposes of this
8subdivision, including a definition for “ceases operation.”

9(3) For the purposes of this subdivision, all of the following
10definitions apply:

11(A) “Deployed” means being called to active duty or active
12service during a period when a Presidential Executive order
13 specifies that the United States is engaged in combat or homeland
14defense. “Deployed” does not include either of the following:

15(i) Temporary duty for the sole purpose of training or processing.

16(ii) A permanent change of station.

17(B) “Operates at a loss” means negative net income as defined
18in Section 24341.

19(C) “Small business” means a corporation with total income
20from all sources derived from, or attributable, to the state of two
21hundred fifty thousand dollars ($250,000) or less.

22(4) This subdivision shall become inoperative for taxable years
23beginning on or after January 1, 2020.

24(j) Notwithstanding subdivision (a), for taxable years beginning
25on or after January 1, 2017, corporations subject to the minimum
26franchise tax shall pay annually to the state a minimum franchise
27tax of one hundred fifty dollars ($150).

28(2) This subdivision shall not apply to limited partnerships, as
29defined in Section 17935, limited liability companies, as defined
30in Section 17941, limited liability partnerships, as described in
31Section 17948, charitable organizations, as described in Section
3223703, regulated investment companies, as defined in Section 851
33of the Internal Revenue Code, relating to definition of regulated
34investment company, real estate investment trusts, as defined in
35Section 856 of the Internal Revenue Code, relating to the definition
36of real estate investment trust, and real estate mortgage investment
37conduits, as defined in Section 860D of the Internal Revenue Code,
38relating to REMIC defined.

P11   1

SEC. 2.  

This act provides for a tax levy within the meaning of
2Article IV of the Constitution and shall go into immediate effect.

end delete


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