BILL ANALYSIS �
AB 2512
Page 1
ASSEMBLY THIRD READING
AB 2512 (Skinner)
As Amended April 10, 2012
Majority vote
REVENUE & TAXATION 6-2 APPROPRIATIONS 12-5
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|Ayes:|Perea, Beall, Charles |Ayes:|Fuentes, Blumenfield, |
| |Calderon, Wieckowski, | |Bradford, Charles |
| |Fuentes, Gordon | |Calderon, Campos, Davis, |
| | | |Gatto, Hall, Hill, Lara, |
| | | |Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Wagner, Nestande |Nays:|Harkey, Donnelly, |
| | | |Nielsen, Norby, Wagner |
| | | | |
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SUMMARY : Imposes a $2,000 penalty on certain foreign and
domestic limited liability companies (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 state or whose powers, rights, and privileges have
been forfeited; and,
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.
AB 2512
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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.
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 :
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."
AB 2512
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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.
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 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.
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
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
AB 2512
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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.
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.
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.
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 state, 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.
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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 Assembly Revenue and Taxation
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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098 FN:
0003449