BILL ANALYSIS �
AB 368
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Date of Hearing: April 4, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 368 (Morrell) - As Introduced: February 14, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Corporation Tax: minimum annual tax
SUMMARY : Exempts a new corporation, limited partnership (LP),
limited liability partnership (LLP), and limited liability
company (LLC) from the annual minimum tax for the first year of
operation and reduces the amount of that tax from $800 to $400
for five subsequent years. Specifically, this bill :
1)Exempts each corporation, LP, LLP, and LLC that first
commences business on or after January 1, 2012 and before
January 1, 2018 from the minimum annual tax for the first
taxable year.
2)Reduces the minimum annual tax imposed from $800 to $400 for
each of the five subsequent taxable years.
3)Applies only to a corporation, LP, LLP, and LLC categorized as
a "small business."
4)Defines a "small business" as any taxpayer that, for the
previous taxable year, had "gross receipts," less returns and
allowances, of $1 million or less.
5)Defines "gross receipts" as gross amounts realized on the sale
or exchange of property, the performance of services, and the
use of property or capital as specified. "Gross receipts"
does not include repayment of the principal of a loan, damages
received from litigation, tax refunds, and pension reversions,
among other items.
6)Does not apply to any corporation, LP, LLP, or LLC that
reorganizes solely for the purpose of reducing its minimum
annual tax.
7)Applies to taxable years beginning on or after January 1, 2012
and before January 1, 2018.
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8)Takes effect immediately as a tax levy.
EXISTING LAW imposes a franchise tax on all corporations doing
business in California equal to 8.84% of the taxable income
attributable to California. A minimum franchise tax of $800 is
imposed on all corporations that are incorporated under
the laws of California, qualified to transact intrastate
business in California, or are doing business in California.
Taxpayers must pay the minimum franchise tax only if it is more
than their regular franchise tax liability. Specifically:
1)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.
2)According to the Franchise Tax Board (FTB), for taxable years
beginning on or after January 1, 1997, only taxpayers with net
income less than approximately $9,040 pay the minimum
franchise tax because the amount of measured tax owed would be
less than $800 ($9,039 x 8.84% = $799).
3)LPs, LLPs, and LLCs that are doing business in California,
registered or qualified to do business in California, or
formed in this state, are subject to annual tax in an amount
equal to the minimum franchise tax, currently set at $800.
These entities (known as 'pass-through entities') are not
subject to any tax based on 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.
4)Real estate mortgage investment conduits (REMICs) and
financial asset securitization investment trusts (FASITs) are
subject to, and are required to pay, the minimum franchise
tax. Regulated investment companies (RICs) and real estate
investment trusts (REITs) organized as corporations are also
subject to and are required to pay the minimum franchise tax.
RICs, REITs, REMICs, and FASITs are entities authorized by the
federal government for special tax treatment. California
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conforms in large part to federal tax provisions but subjects
each entity to payment of the annual minimum tax.
5)LLCs and certain small corporations, solely owned by a
deployed member of the United States (U.S.) Armed Forces, are
exempted until January 1, 2018 from the $800 annual tax and
minimum franchise tax.
FISCAL EFFECT : The FTB staff estimate that this bill will
result in no revenue loss in fiscal year (FY) 2011-12, and
losses of $45 million in FY 2012-13, $100 million in FY 2013-14,
and $150 million in FY 2014-15.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
"Currently, California businesses are required to pay a
Minimum Franchise Tax of $800 annually. In other words,
businesses are required to pay the state every year just
for having their doors open. With record levels of
unemployment (currently the second highest in the nation)
California needs to be taking steps to attract new
employers and encourage lasting job growth. One solution
is to help improve our economic climate by reducing startup
costs for new businesses to $400 for their first six years
of operation in order to help new entrepreneurs get
started. This bill will help put California back on track
by removing some of the burdens on job-creating
businesses."
2)Committee staff notes all of the following:
a) 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.
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b) 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, where it has remained.
c) Neighboring states assess a lower minimum tax than
California, but they also possess a much smaller market
share than California. California's current population is
about 37 million. Arizona's current population is just
over 6 million, Nevada's population is 2.7 million, as is
Utah's population, and Oregon's population is over 3.8
million. A business in California has access to tens of
millions of additional customers than a business in
neighboring states, allowing businesses the opportunity to
attain greater profits from a potentially larger customer
base.
d) Although the argument has been made that California's
minimum franchise tax may dissuade small businesses from
locating in California, statistics show that California has
a larger number of small businesses than neighboring
states. According to the U.S. Small Business
Administration, the most recent numbers show that
California has 3,475,399 small businesses. Arizona has
496,624, Nevada has 223,061, Oregon has 352,403, and Utah
has 245,532 small businesses. Even when accounting for the
differences in population, California has a greater
percentage per capita of small businesses.
e) It has never been shown that the minimum franchise tax
discourages businesses, particularly, since small
businesses can always organize as sole proprietorships to
avoid paying the minimum franchise tax.
f) Because the franchise tax is the greater of the minimum
franchise tax or tax of 8.84% on the corporations' taxable
income, the actual beneficiaries of this bill are
corporations that report minimal taxable income and all
pass-through entities, regardless of the amount of income
earned. Consequently, profitable entities that are formed
as LLCs, LPs or LLPs will reap tax savings every taxable
year.
3)Related Legislation.
AB 821 (Garrick), introduced in the current Legislative
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Session, would reduce the minimum annual tax for small
businesses for 10 taxable years. AB 821 is set to be heard in
this Committee on April 4, 2011.
AB 831 (Silva), introduced in the current Legislative Session,
would exempt a single member limited liability company or a
governmental entitle from the annual minimum tax. AB 831 is
set to be heard in this Committee on April 4, 2011.
AB 166 (Cook), introduced in the current Legislative Session,
would eliminate the minimum franchise tax from $800 to $0. AB
166 is currently pending on this Committee's suspense.
AB 2671 (Cook), Chapter 394, Statutes of 2010, exempts, until
2010, certain small corporations and LLCs solely owned by a
deployed member of the U.S. Armed Forces from the annual
minimum franchise tax.
AB 327 (Garrick), introduced in the 2009-10 Legislative
Session, would have reduced the minimum franchise tax from
$800 to $100. AB 327 was held under submission in this
Committee.
AB 2126 (Garrick), introduced in the 2009-10 Legislative
Session, would have reduced the minimum franchise tax from
$800 to $100. AB 327 was held under submission in the
Assembly Appropriations Committee.
AB 2178 (Garrick), introduced in the 2007-08 Legislative
Session, would have reduced the minimum franchise tax from
$800 to $200. AB 2178 was held under submission in this
Committee.
AB 1179 (Garrick), introduced in the 2007-08 Legislative
Session, is similar to AB 327. AB 1179 was held in this
committee.
AB 1419 (Campbell), introduced in the 1997-98 Legislative
Session, would have reduced the minimum franchise tax for a
qualified corporation from $800 to $100. AB 1419 failed
passage in the Senate Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
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None on file
Opposition
California Tax Reform Association.
Analysis Prepared by : Myriam Bouaziz and Oksana Jaffe / REV. &
TAX. / (916) 319-2098