BILL ANALYSIS
AB 2458
Page 1
ASSEMBLY THIRD READING
AB 2458 (Saldana)
As Amended May 3, 2010
Majority vote
REVENUE & TAXATION 8-0 APPROPRIATIONS 16-0
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|Ayes:|Portantino, DeVore, |Ayes:|Fuentes, Conway, Ammiano, |
| |Beall, Coto, Fuentes, | |Bradford, Coto, Davis, |
| |Harkey, Nestande, Saldana | |Hill, Hall, Harkey, |
| | | |Miller, Nielsen, Norby, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Torrico |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Extends the due date for the payment of the Limited
Liability Company (LLC) fee underpayment penalty 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 LLC fee within 60 days from the
date on which the small business is notified of the penalty.
2)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.
3)Applies to penalties imposed or assessed on or after January
1, 2011, and before January 1, 2016.
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 sixth month of the taxable year (e.g., June 15th
for calendar year taxpayers). The LLC fee ranges from zero
AB 2458
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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
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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, the Franchise Tax Board (FTB) staff estimates that
this bill will result in a loss of less than $150,000 in fiscal
year (FY) 2010-11, and less than $10,000 in FYs 2011-12 through
2015-16, due to a delay in the timing of the collection of the
underpayment penalty and interest thereon.
COMMENTS : 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, 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 the understatement penalty assessed due to their inability
to pay the required annual LLC fee on time.
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 Secretary of State). 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
AB 2458
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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.
What is an LLC fee? SB 469 (Beverly), Chapter 1100, Statutes
of 1994, authorizes 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 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.
The 10% Underpayment Penalty. Beginning with the 2009 taxable
year, the LLC fee must be estimated and paid by the 15th day of
the sixth 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
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taxpayers. AB 1452 (Committee on Budget), Chapter 784, Statutes
of 2008, enacted as part of the 2008-09 budget, conforms 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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0004324