BILL ANALYSIS �
AB 2086
Page 1
Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2086 (Calderon) - As Amended: May 7, 2014
Policy Committee: Revenue &
Taxation Vote: 9-0
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill provides limited liability companies (LLCs) with
various installment payment options for paying the minimum
franchise tax, and provides corporations with similar
installment payment options for paying the estimated minimum
franchise tax. In each case, the LLC or corporation will be
allowed to choose one of the following payment options:
1)On or before the 15th day of the fourth month of the taxable
year.
2)In two equal installments, with the first installment on or
before the 15th day of the fourth month of the taxable year
and the second installment on or before 12 months of that
date.
3)In three equal installments on or before the 15th day of the
4th, 8th, and 12th months of the taxable year.
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 $240 million, $23 million,
and $8 million in FY 2014-15, FY 2015-16, and FY 2016-17,
respectively, as payments that would have been made in FY
2014-15 and FY 2015-16 are deferred to subsequent years.
COMMENTS
AB 2086
Page 2
1) Purpose. According to the author, the recent recession
continues to affect California, and long-term solutions to
reduce the state's unemployment and create business
opportunities are needed to increase California's
competitiveness. The author contends the state's high
corporate taxes threaten its position as a leader in economic
opportunity and job creation.
Proponents argue this bill eases the minimum franchise tax
burden on LLCs by allowing them three different payment
options: (i) on or before April 15 of each year; (ii) in two
equal installments due on or before April 15, and within 12
months of the date of the first installment; and (ii) in three
equal installments due on or before April 15, August 15, and
December 15 of each year.
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 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
AB 2086
Page 3
an annual minimum franchise tax of $800.
4) Liquidity and Cash Flow. By allowing LLCs to pay their
minimum franchise tax in installments, this bill arguably
helps reduce cash flow demands on those businesses.
Businesses use many different strategies to manage cash flows,
including credit, deferred payments, and installment payment
arrangements. The smoothest payment option from a cash flow
perspective allowed under this bill is the three payments
option, whereby a business makes three equal payments of
$266.67 throughout the year, saving them $533.33 on what would
otherwise be an $800 payment obligation on April 15.
While it would be perfectly rational for eligible businesses
to utilize this installment payment option, it is unclear that
any business would experience a material improvement in its
solvency or cash flow position from this option. 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.
a) AB 1645 (Alejo) of 2014 exempts business entities from
the minimum franchise tax for their first two taxable
years. AB 1645 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.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081