BILL ANALYSIS �
AB 2244
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Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2244 (Chau) - As Amended: May 15, 2014
Policy Committee: Revenue &
Taxation Vote: 8-0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill lowers the minimum franchise tax a business entity is
required to pay, on or after January 1, 2015, from the current
$800 to $200 if the business entity is dormant or $50 if the
business entity is inactive. The bill defines the following
terms:
1)"Business entity" as a corporation, LP, LLC, LLP, charitable
corporation, regulated investment company (RIC), real estate
investment trust (REIT), real estate mortgage investment
conduit (REMIC), or a qualified Subchapter S subsidiary.
2)"Dormant business entity" as a business entity that is
organized under the laws of this state or has qualified to
transact intrastate business in this state, and that
certifies, under penalty of perjury, with its return for the
taxable year, that it was not doing business in this state for
that taxable year. A business entity may be a dormant
business entity for no more than one period of five
consecutive taxable years.
3)"Inactive business entity" as a business entity, other than an
LP or an LLP, that is organized under the laws of this state
or has qualified to transact intrastate business in this
state, and that reasonably believes that it will not be doing
business in this state for that taxable year. A business
entity may be an inactive business entity for no more than one
period of five consecutive taxable years.
An inactive business that was actually doing business in a
year in which it believed it would be inactive must pay an
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additional tax of $750 upon filing its return.
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 $2 million, $6 million, and
$11 million in FY 2014-15, FY 2015-16, and FY 2016-17,
respectively.
COMMENTS
1) Purpose. According to the author, corporations are often
formed with grand intentions but never actually do business.
Others are formed, operate for a few years and then, for many
different reasons, stop doing business. If a business entity
has not been doing business, it often fails to file a tax
return, causing the FTB to pursue those entities for the
missing returns and assessing additional penalties and fees.
Proponents argue this bill will help reduce the burden on
dormant or inactive businesses that have not done business in
the state within the last year or do not reasonably likely to
do business in the state. Proponents assert this reduction
will help those businesses that have not benefitted from
transacting any activity, and therefore should not owe the
minimum franchise tax.
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
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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) Dormancy and Inactivity. It is not unusual for a business to
cease activity or operations without properly winding up and
paying the minimum franchise tax. A significant portion of
inactive businesses currently do not remit any minimum
franchise tax. Somewhat ironically, the limited liability
afforded these entities limits FTB's ability to ever collect
these unpaid taxes. While this bill creates a lower tax
requirement for dormant and inactive businesses, it is unclear
whether many businesses would volunteer to pay the reduced tax
when they might otherwise cease operations and choose to pay
no tax at all.
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 pending in this Committee.
b) AB 2086 (Calderon) of 2014 creates installment payment
options for LLCs to pay the minimum franchise tax. AB 2086
is pending in this Committee.
c) AB 2466 (Nestande) of 2014 reduces the minimum franchise
tax for new veteran-owned small businesses. AB 2466 is
pending in this Committee.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081
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