BILL ANALYSIS
AB 2458
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 2458 (Saldana)
As Amended June 29, 2010
Majority vote
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|ASSEMBLY: |72-0 |(May 20, 2010) |SENATE: |33-0 |(August 19, |
| | | | | |2010) |
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Original Committee Reference: REV. & TAX.
SUMMARY : Extends the due date for the payment of the Limited
Liability Company (LLC) fee underpayment penalty imposed on
small businesses, as defined.
The Senate amendments modify the definition of "small business"
by reducing the amount of eligible total income from $1 million
to $500,000.
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
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.
AS PASSED BY THE ASSEMBLY , this bill:
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1)Allowed 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 was notified of the penalty.
2)Defined 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)Applied to penalties imposed or assessed on or after January
1, 2011 and before January 1, 2016.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill will result in a loss of less than $20,000 in
fiscal year (FY) 2009-10, $1,000 in FY 2010-11, and $1,000 in FY
2011-12.
COMMENTS : 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
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
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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.
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
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 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,
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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 $500,000 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: 0005550