BILL ANALYSIS
AB 2458
Page 1
Date of Hearing: April 12, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2458 (Saldana) - As Amended: April 5, 2010
Majority vote. Fiscal committee.
SUBJECT : Taxation: penalties: corporations.
SUMMARY : Extends the due date for the payment of specified
penalties imposed on small businesses, as defined.
Specifically, this bill :
1)Allows a small business to pay the 10% penalty for the
underpayment of the estimated Limited Liability Company (LLC)
fee within 60 days from the date on which the small business
is notified of the penalty.
2)Allows a small business to pay the penalty assessed for the
failure to file the Statement of Information with the
Secretary of State (SOS) within 60 days from the date on which
the small business is notified of the penalty.
3)Defines the phrase "small business" as a business whose total
income from all sources derived from, or attributable to, this
state for the taxable years is $1 million or less.
4)Applies to penalties imposed or assessed on or after January
1, 2011.
EXISTING LAW:
1)Imposes the $800 annual minimum franchise tax on an LLC not
classified as a corporation and the annual LLC fee if it is
organized, doing business, or registered in California. The
annual LLC fee is based on total income from all sources
derived from, or attributable to, this state.
2)Requires an LLC to estimate and pay its LLC fee by the 15th
day of the 6th month of the taxable year (e.g. June 15th for
calendar year taxpayers). The LLC fee ranges from zero for
LLCs with total income from all sources reportable to this
state of less than $250,000, to a maximum of $11,790 for LLCs
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with total income from all sources reportable to this state of
$5 million or more.
3)Imposes a 10% penalty for an underpayment of the estimated LLC
fee. However, the underpayment penalty is not imposed when
the estimated fee payment for a taxable year is greater than
or equal to the LLC's prior year fee liability. Requires an
LLC to pay by the due date of the LLC's return any amount of
the LLC fee due that was not paid as an estimated fee payment.
4)Requires every domestic and registered foreign LLC and
corporation to file a Statement of Information with the SOS,
within 90 days after the filing of its original Articles of
Organization or Application for Registration, and biennially
thereafter, during the applicable filing period.
5)Imposes a penalty for failure to file the Statement of
Information with the SOS by the due date. Once the SOS
certifies the name of the corporation to the Franchise Tax
Board (FTB), FTB will assess the penalty of either $250, in
the case of LLCs and corporations, or $50, in the case of
nonprofit public benefit corporations and nonprofit mutual
benefit corporations.
6)Provides that the penalty for failure to file the Statement of
Information is collected in the same manner as other taxes,
penalties, and interest, unless the SOS decertifies the name
of the corporation.
FISCAL EFFECT : The FTB staff tentatively estimates that this
bill will result in a loss of less than $150,000 per year due to
a delay in the timing of the collection of the underpayment
penalty and interest thereon.
COMMENTS :
1)The Purpose of this Bill . According to the author, this bill
is intended to provide some relief to struggling companies and
to help Californians stay employed. California is unique in
that a majority of the businesses in the state are small
businesses. Many small businesses are experiencing financial
hardship and, if those companies go out of business, the state
would lose revenue from employment and personal income taxes.
As a result, the state will, likely, have to pay for services,
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such as health coverage and unemployment compensation, needed
by the laid off employees. This bill would provide small
businesses that are organized as LLCs an additional 60 days to
pay any late penalties assessed due to their inability to pay
the required annual fee on time.
2)Background. An LLC is a business entity formed by members by
filing a document, usually called "Articles of Organization,"
with an officer designated by state law (in California, it is
the SOS). An LLC combines aspects of partnerships and
corporations, so an LLC is less formal and more flexible than
a typical corporation, yet offers protection as well as
certain advantages that are much the same. For example, its
owners have limited liability for the entity's debts and
obligations, similar to the status of shareholders in a
corporation. Their assets are separate from the assets of the
LLC so they cannot be seized and, generally, there is no
requirement that there be at least one general partner liable
for the debts and obligations of the partnership. Members of
the LLC may choose for the LLC to be taxed as a regular
corporation or as a partnership, where the income and losses
are normally passed through to the owners. Flow-through
taxation is advantageous since members are only required to
pay taxes on their earnings once instead of paying both
corporate and individual taxes.
3)What is an LLC fee ? SB 469 (Beverly), Chapter 1100, Statutes
of 1994, authorized formation of LLCs in California. The
Legislature feared that the federal tax benefits conferred by
LLC status would lead many businesses to change to the LLC
form and provide an incentive for new businesses to choose LLC
status, thereby diminishing the state's corporate tax base
without a commensurate LLC entity-level tax. In recognition
of the expected revenue loss as LLCs replaced corporations as
the form of choice for business entities, SB 469 contained
both an annual tax (in an amount equal to the minimum
franchise tax and the limited partnership tax) and an annual
fee (based on total income received by the LLC). It was
thought that the fee would ensure that allowing LLCs to do
business in California had a neutral effect to the state's
revenues. Initially, the Legislature set the fee based on an
LLC's income, with five levels, and the amount of tax was
capped at $4,000 in 1994 and 1995, and $4,500 in 1996. The
Legislature allowed FTB to study and revise LLC fee amounts to
ensure state revenue neutrality [SB 715 (Committee on Revenue
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and Taxation)], resulting in higher fee amounts in 1999 and
2000, then repealed FTB's fee adjustment authority and
instituted the current fee amounts [AB 898 (Leach), Chapter
391, Statutes of 2001].
Currently, the LLC fees range from $900 for gross incomes under
$500,000 to $11,790 for gross incomes of $5 million or more.
4)The 10% Underpayment Penalty. Beginning with the 2009 taxable
year, the LLC fee must be estimated and paid by the 15th day
of the 6th month of the current taxable year. If the company
is unable to pay the estimated tax on time, a penalty equal to
10% of the underpayment of the estimated fee will apply.
Prior to 2009, FTB was allowed to assess the underpayment
penalty of 5% of the underpaid balance, and a late filing
penalty of .05% of the underpaid balance per month that
applied to personal income taxpayers. AB 1452 (Committee on
Budget), Chapter 784, Statutes of 2008, enacted as part of the
2008-09 budget, conformed the treatment of LLCs to local
business license taxes and personal income taxes, which
require estimated payment in the tax year, instead of the
following year. Generally, strict, enforceable penalties lead
to higher compliance rates. However, the 10% penalty is
relatively high, in comparison to other comparable
understatement penalties, especially for many businesses that
are currently struggling to keep their doors open and
legitimately cannot afford to pay the required fees on time.
This bill is narrowly drafted since it applies only to small
businesses, i.e. businesses with total income of $1 million or
less, and is not expected to cause any significant revenue
loss to the General Fund.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
AB 2458
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