BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 2671|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: AB 2671
Author: Cook (R), et al
Amended: 7/15/10 in Senate
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 3-0, 6/23/10
AYES: Wolk, Alquist, Padilla
NO VOTE RECORDED: Walters, Ashburn
SENATE APPROPRIATIONS COMMITTEE : 11-0, 8/12/10
AYES: Kehoe, Ashburn, Alquist, Corbett, Emmerson, Leno,
Price, Walters, Wolk, Wyland, Yee
ASSEMBLY FLOOR : 72-0, 5/20/10 (Consent) - See last page
for vote
SUBJECT : Corporation taxes: minimum franchise tax:
Armed Forces
SOURCE : Author
DIGEST : This bill exempts, until taxable years beginning
on or after January 1, 2018, 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 ceases operation or operates at a
loss, as defined.
CONTINUED
AB 2671
Page
2
ANALYSIS : Corporations and limited liability companies
(LLCs) must annually pay to the state a minimum franchise
tax of $800. This liability exists regardless of whether
the corporation is earning income. Businesses
incorporating after January 1, 2000 are not subject to the
minimum franchise tax for their first taxable year.
This bill exempts corporations and LLCs that are small
businesses solely owned by a deployed member of the United
States Armed Forces from the minimum franchise tax and the
annual LLC tax, respectively, if the corporation or LLC
ceases operation or operates at a loss. This bill requires
the Franchise Tax Board (FTB) to promulgate regulations to
provide for a definition of "ceases operation" for purposes
of this bill.
This bill provides the following definitions:
"Deployed" means being called to active duty or active
service during a period when a Presidential Executive
order specifies that the United Sates in engaged in
combat or homeland defense. "Deployed" does not include
temporary duty for the sole purpose of training or
processing or a permanent change of station.
"Operates at a loss" means negative net income as defined
in Section 24341 of the Revenue and Taxation Code.
"Small business" means a corporation or LLC with total
income of $250,000 or less.
Background
The minimum franchise tax was enacted to ensure that all
corporations pay at least a minimum amount of franchise tax
for the privilege of doing business in this state,
regardless of the corporation's income or loss. Thus, the
minimum franchise tax is not technically an "income tax",
but rather it is a tax on the right to exercise the powers
granted to a corporation doing business in California.
Even when a corporation earns no income, it still receives
the benefits of its corporate status, including the limited
liability protection under the laws of this state.
AB 2671
Page
3
California's minimum tax was increased from $100 to $200 in
1972. It was increased to $300 in 1987, to $600 in 1989,
and to $800 in 1990. Limited exceptions exist with respect
to imposition of the minimum franchise tax. For instance,
credit unions and nonprofit organizations are not subject
to the minimum franchise tax and a corporation is not
subject to the minimum franchise tax for its first taxable
year. However, even though a corporation is not subject to
the minimum tax in its first taxable year, it will be
subject to franchise tax in its first taxable year based on
its taxable income.
Limited partnerships and limited liability partnerships
that are doing business in California, registered or
qualified to do business in California, or formed in this
state are also subject to the $800 annual tax. Like LLCs
and S-corporations, these are "pass-through" entities and
are not subject to any tax based on their taxable income.
Rather, the items of income, gain, loss, deduction and
credit are passed-through to the owners and reported on
their respective income or franchise tax returns. However,
by definition, partnerships cannot be "solely owned" small
businesses and subsequently are excluded from this bill.
Comments
The purpose of this bill is to provide tax relief to
members of the United States Armed Forces called to service
to defend the nation.
Minimum tax in other states . According to the Franchise
Tax Board, the following states currently impose a minimum
franchise tax:
1. Illinois has a minimum one percent tax based on
"paid-in" capital (calculated using the shares of stock
issued by the corporation as disclosed in the annual
statement reported to the Illinois Secretary of State).
The tax ranges from a minimum of $25 to a maximum of $1
million.
2. Massachusetts imposes the greater of a corporate excise
tax of 9.5 percent based on taxable income or a minimum
tax equal to $456.
AB 2671
Page
4
3. Beginning January 1, 2008, Michigan taxpayers are
subject to the Michigan Business Tax. The Michigan
Business Tax is composed of two taxes: a business
income tax of 4.9 percent on every taxpayer with
business activity in the state, and a modified gross
receipts tax of 0.80 percent on every taxpayer having
nexus with Michigan.
4. Minnesota imposes a franchise tax on a corporation's
taxable income at the rate of 9.8 percent. In addition,
a minimum franchise tax, ranging from $0 to $5,000, is
imposed based on the sum of the property determined by
property, payroll, and sales in the state.
5. New York imposes a franchise tax of 7.1 percent based on
net income plus a fixed dollar minimum tax based on
gross payroll. The fixed dollar minimum tax ranges from
$100 to $1,500.
The author states, "The Franchise Tax Board's minimum
annual tax for all corporations, including S-corps,
C-corps, partnerships, and LLC's is set at $800 per fiscal
year. Regardless of the profitability of the business
entity, this annual tax is a 'cost of doing business in
California' fee, no matter the circumstance. Present law
does not account for the unique situations that arise from
deployments of service members answering the call of duty
to country. Military service members on active or reserve
duty who are either major share holders of these business
entities, are self employed by the corporation but are
deployed and cease to do business, or operate in the
negative during the span of their deployment, or any
combination thereof, are equally (and unfairly) required to
pay the $800 minimum franchise tax fee. "
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
Senate Appropriations Committee staff notes that the fiscal
impact of this bill depends upon the number of small
business owners who are deployed in a given year, and whose
business either operates at a loss or ceases operation in a
taxable year. FTB estimates that approximately 60 small
AB 2671
Page
5
corporations and LLCs owned by deployed United States Armed
Forces members would either cease operation or operate at a
loss in a given year, which would result in an annual
revenue loss of $48,000. Actual losses are indeterminable,
based on available data, and could be somewhat higher.
SUPPORT : (Verified 8/17/10)
American Legion, Department of California
AMVETS, Department of California
Vietnam Veterans of America, California State Council
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall,
Bill Berryhill, Tom Berryhill, Blakeslee, Block,
Blumenfield, Bradford, Brownley, Buchanan, Caballero,
Charles Calderon, Carter, Chesbro, Conway, Cook, Coto,
Davis, De Leon, DeVore, Emmerson, Eng, Feuer, Fong,
Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,
Gilmore, Hagman, Hall, Hayashi, Hernandez, Hill, Huber,
Huffman, Jeffries, Jones, Knight, Lieu, Logue, Bonnie
Lowenthal, Ma, Mendoza, Miller, Monning, Nestande,
Niello, Nielsen, Norby, V. Manuel Perez, Portantino,
Ruskin, Salas, Saldana, Silva, Skinner, Smyth, Solorio,
Audra Strickland, Swanson, Torlakson, Torres, Torrico,
Tran, Yamada
NO VOTE RECORDED: De La Torre, Evans, Fletcher, Harkey,
Nava, Villines, John A. Perez, Vacancy
DLW:mw 8/17/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****