BILL ANALYSIS �
AB 1645
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Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1645 (Alejo) - As Amended: April 21, 2014
Policy Committee: Revenue &
Taxation Vote: 7-1
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill exempts limited partnerships (LPs), limited liability
companies (LLCs), and limited liability partnerships (LLPs) that
are doing business in California on or after January 1, 2015,
from the minimum franchise tax in the first two taxable years,
and exempts corporations doing business in California on or
after January 1, 2015, from the minimum franchise tax in the
second taxable year. The bill further specifies the corporate
exemption is not available to charitable organizations,
regulated investment companies, real estate investment trusts,
real estate mortgage investment conduits, and qualified
subchapter S subsidiaries.
FISCAL EFFECT
1)Potentially significant GF costs to Franchise Tax Board (FTB)
to administer the changes to forms and systems.
2)Estimated GF revenue decreases of $36 million, $120 million,
and $170 million in FY 2014-15, FY 2015-16, and FY 2016-17,
respectively.
COMMENTS
1) Purpose. According to the author, California has one of the
highest minimum franchise taxes in the United States, and
needs to address this in order to stimulate economic growth.
In 2011, the FTB reported 266,969 businesses had a net loss in
income, while another 53,423 had no net income. Furthermore,
the author asserts a third of all businesses fail within their
first two years. This bill eliminates the minimum franchise
AB 1645
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tax for most business entities for the first two taxable
years, thereby lowering startup costs.
2) Existing Law. California imposes a minimum franchise tax of
$800 on all corporations and an equivalent tax of $800 on LPs,
LLPs, and LLCs organized or doing business in the state.
Corporations are generally subject to tax on income, and must
pay the minimum franchise tax only if it is more than their
regular franchise tax liability. LPs, LLPs, and LLCs are
usually pass-through entities for tax purposes, and as a
result most pay only the minimum franchise tax. Corporations
are not subject to the minimum franchise tax in their first
taxable year.
3) Justification for Minimum Tax. As indicated in their
respective statutes, the minimum franchise tax was enacted to
ensure that business entities pay a minimum amount for the
"privilege of conducting business" in California and the
benefits of limited liability. The minimum tax is not an
income tax but instead a tax on the privilege to exercise
corporate powers and the benefits to owners of limited
liability. Even when a business earns no income, it still
receives the benefits of the "corporate veil" under state law.
The creation of LLPs and LLCs in particular extended the
privileges of corporate power and limited liability without
the more complicated tax status and governance requirements of
a full corporation. The corporate veil is critical to capital
formation in businesses large and small, and provides
protection to owners and creditors from liability in tort and
insolvency situations. In exchange for protecting business
owners and creditors, the state requires these entities to pay
an annual minimum franchise tax of $800.
4) Modest Benefit. While businesses would undoubtedly welcome a
savings on the minimum franchise tax and the consequent
improvement to their cash positions, it is unclear that any
business would experience a material improvement in its
solvency or cash position from this savings. An alternative
justification for this bill may simply be that a modest
improvement to cash positions for businesses will help
stimulate additional consumption and economic activity.
5) Related Legislation.
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a) AB 2086 (Calderon) of 2014 creates installment payment
options for LLCs to pay the minimum franchise tax. AB 2086
is currently pending in this committee.
b) AB 2244 (Chau) of 2014 reduces the minimum franchise tax
for dormant and inactive businesses. AB 2244 is currently
pending in this committee.
c) AB 2466 (Nestande) of 2014 reduces the minimum franchise
tax for new veteran-owned small businesses. AB 2466 is
currently pending in this committee.
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Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081