BILL ANALYSIS �
AB 2512
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Date of Hearing: April 9, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2512 (Skinner) - As Introduced: February 24, 2012
Majority vote. Fiscal committee.
SUBJECT : Income taxes: a limited liability company (LLC):
penalties.
SUMMARY : Imposes a $2,000 penalty on certain foreign and
domestic LLCs, as specified, for failure to file a tax return.
Specifically, this bill :
1)Makes the existing $2,000 penalty imposed for each taxable
year for failure to file a tax return applicable to both of
the following entities that are doing business in California:
a) A foreign LLC that fails to qualify to do business in
this states or whose powers, rights, and privileges have
been forfeited.
b) A domestic LLC that has been suspended.
2)Specifies that the penalty will not be imposed if the failure
to file is due to reasonable cause and not willful neglect.
3)Provides that the penalty shall be imposed if the return is
not filed within 60 days after the Franchise Tax Board (FTB)
sends the LLC a notice and demand to file the required return.
4)Applies to non-qualified, suspended, or forfeited LLCs that
fail to file a return on or after January 1, 2013.
EXISTING LAW :
1)Authorizes the creation of various business entities,
including corporations and LLCs. Provides that all
corporations and LLCs, which are either doing business in
California, or incorporated or registered and qualified by the
Secretary of State (SOS) to do business in California, must
file appropriate income tax returns or information returns and
pay the appropriate tax, penalties, and interest.
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2)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. Imposes a
penalty for failure to file the Statement of Information with
the SOS by the due date.
3)Authorizes FTB to suspend a corporation's and an LLC's powers,
rights, and privileges for non-payment of fees due or
non-filing of tax returns. �Revenue and Taxation Code (R&TC)
Section 23301 and Section 23301.5].
4)Provides that any corporation or any LLC that fails to file a
tax return after receiving a notice of demand to file may be
subject to a demand penalty. In addition, a foreign
corporation that fails to qualify to do business in
California, or any corporation whose powers, rights or
privileges have been forfeited or suspended, and which is
doing business in California, may also be subject to a $2,000
penalty for failure to file a return, as required.
FISCAL EFFECT : The FTB staff tentatively estimates that this
bill will result in a gain of $330,000 in the fiscal year (FY)
2011-12, $400,000 in FY 2012-13, $490,000 in FY 2013-14,
$600,000 in FY 2014-15, and $700,000 in FY 2015-16.
COMMENTS :
1)Author's Statement . The author states that, "AB 2512 helps to
conform treatment of corporations and LLCs by the Franchise
Tax Board (FTB), while ensuring that businesses in our state
are in compliance with the law."
2)The Purpose of this Bill . According to the FTB, this bill is
intended to provide consistent and equitable treatment for
failure to file a return for both LLCs and corporations by
subjecting LLCs to the same penalty that currently applies to
similarly situated corporations.
3)Background: What is an LLC ? SB 469 (Beverly), Chapter 1100,
Statutes of 1994, authorized formation of LLCs in California.
LLCs were specifically included in the definition of
"taxpayer" and the FTB was authorized to submit LLCs for
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suspension to the SOS for non-payment of taxes or for failure
to file required tax returns.
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. 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. 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.
The Legislature feared that the federal tax benefits conferred
by LLC status would lead many businesses to change to the LLC
form and would 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). In
addition to the $800 annual tax, every LLC must pay a fee if
the total California annual income is equal to or greater than
$250,000. 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. Currently, the LLC fees vary
from $900 for income ranging between $250,000 and $499,999 to
$11,790 for income of $5 million or more.
4)Tax Filing Requirements for LLCs . All LLCs classified as
partnerships or disregarded entities that organize in
California, register in California, or conduct business in
California, must file California Form 568 Limited Liability
Company Return of Income. California Form 568 must be filed
by the 15th day of the 4th month after the close of the LLC's
taxable year. An LLC required to file Form 568 must pay an
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annual tax of $800 and may be subject to an LLC fee based on
its total income derived from, or attributable to, the state
of California. The annual tax is due by the 15th day of the
4th month of the taxable year.
All LLCs classified as corporations that organize in
California, register in California, conduct business in
California, or receive California source income, must file
California Form 100. The California Form 100 must be filed by
the 15th day of the 3rd month after the close of the LLC's
taxable year. The LLC will be taxed at the corporate tax rate
of 8.84% and will be subject to a minimum franchise tax of
$800.
5)The $2,000 Penalty for Failure to File a Tax Return . The
Legislature authorizes the FTB to impose a $2,000 penalty on a
corporation for failure to file a tax return, unless the
failure to file is due to reasonable cause and not willful
neglect. (R&TC Section 19135). This penalty was created to
apply only to corporations, including "S" corporations, that
are doing business in the state while suspended or unqualified
to do business in California. Specifically, it applies to any
foreign corporation that fails to qualify to do business in
California or whose powers, rights, and privileges have been
forfeited. It also applies to any domestic corporation that
has been suspended. In both cases, a corporation must be
doing business in California. The penalty is imposed if the
return is not filed within 60 days after the FTB sends the
taxpayer a notice and demand to file the required tax return.
6)More Penalties ? The $2,000 penalty may be imposed on those
specified corporations in addition to other penalties,
including a so-called "demand" penalty, which is authorized by
R&TC Section 19133. Unlike the $2,000 penalty, the "demand"
penalty may be imposed on any taxpayer, including an LLC, for
failure or refusal to furnish any information requested in
writing by the FTB or for failure to make and file a return
upon notice and demand by the FTB, unless the failure is due
to reasonable cause and not willful neglect. R&TC Section
19133 allows the FTB to impose the penalty in an amount equal
to 25% of the amount of tax.
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As noted, the "demand penalty" is applicable to any taxpayer,
including certain disqualified LLCs that are doing business in
California. In other words, a foreign LLC that fails to
qualify to do business in this states, or any LLC whose
powers, rights, and privileges have been forfeited or
suspended, is subject to the demand penalty if it is doing
business in the state and failed to file a tax return within
60 days of receipt of the demand to file.
7)Disparate Treatment ? Under R&TC Section 19135, the FTB is
authorized to penalize corporations that are suspended,
forfeited, or are unqualified to do business in California.
The penalty also applies to "S" corporations, which are
pass-through entities. However, the FTB does not have the
same authority to impose a $2,000 penalty on an LLC that is
suspended or otherwise not qualified to do business in
California, even if the LLC is doing business in the state and
failed to file a required tax return. It is unclear to the
Committee staff why businesses organized as LLCs are treated
differently. The FTB estimates that during the 2010 calendar
year, over 20,000 LLCs were suspended. As stated in the FTB's
analysis of this bill, "assuming that suspended LLCs behave
similarly to corporations, approximately 5% of those LLCs (or
1,011) would have been subject to the $2,000 penalty." By
subjecting LLCs that continue to operate after suspension to
the same $2,000 penalty that is currently applicable to
corporate taxpayers, this bill would rectify inequity of
treating similarly-situated taxpayers differently.
REGISTERED SUPPORT / OPPOSITION :
Support
Franchise Tax Board (Sponsor)
American Federation of State, County, and Municipal Employees,
AFL-CIO
California Federation of Teachers
California Professional Firefighters
California Tax Reform Association
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
AB 2512
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319-2098