California Legislature—2013–14 Regular Session

Assembly Bill No. 2428

Introduced by Assembly Member Patterson

February 21, 2014

An act to amend Sections 17935, 17941, 17942, 17948, and 23153 of, and to add Sections 17202.3 and 23701.1 to, the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.

LEGISLATIVE COUNSEL’S DIGEST

AB 2428, as introduced, Patterson. Taxation: minimum franchise tax: deductions: exemptions.

The Personal Income Tax Law allows various deductions in computing the income that is subject to the tax imposed by that law.

This bill would allow, for taxable years beginning on or after January 1, 2014, as a deduction any income earned or received by a taxpayer that is attributable to a taxpayer’s status as a partner in or sole proprietor of a qualified business, as defined, for the first 5 consecutive taxable years in which the business is a qualified business.

Existing law generally imposes a minimum franchise tax of $800, except as provided, on every corporation incorporated in this state, qualified to transact intrastate business in this state, or doing business in this state, and an annual tax in an amount equal to the minimum franchise tax on every limited partnership, limited liability partnership, and limited liability company registered, qualified to transact business, or doing business in this state, as specified. Existing law requires every limited liability company subject to the annual tax to pay annually to this state a fee equal to specified amounts based upon total income from all sources reportable to this state.

This bill would exempt from the minimum franchise tax every corporation incorporated in this state on or after January 1, 2014, for the first 5 consecutive taxable years during which the corporation does business within this state. This bill would also exempt from the annual tax every limited partnership, limited liability partnership, and limited liability company that files the appropriate form with the Secretary of State on or after January 1, 2014, as specified, for the first 5 consecutive taxable years during with that entity does business within the state. This bill would additionally exempt a limited liability company that files the appropriate form with the Secretary of State on or after January 1, 2014, from the fee equal to specified amounts for the first 5 consecutive taxable years that the limited liability company does business within this state.

The Corporation Tax Law, in modified conformity with federal income tax laws, exempts various types of organizations from state income taxes imposed by that law.

This bill would exempt a corporation that incorporates under the laws of this state on or after January 1, 2014, for the first 5 consecutive taxable years that it does business within this state.

This bill would take effect immediately as a tax levy.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 17202.3 is added to the Revenue and
Taxation Code, to read:

17202.3.  

(a) (1) For each taxable year beginning on or after
January 1, 2014, there shall be allowed as a deduction the amount
of qualified income earned or received by a taxpayer from a
qualified business.

(2) The deduction allowed under this section shall apply only
for the first five consecutive taxable years in which the business
is a qualified business.

(b) For purposes of this section:

(1) “Qualified business” means a business that, on or after
January 1, 2014, is either a sole proprietorship, a general
partnership that commences business within this state, a limited
partnership, or a limited liability partnership, that files the
applicable document or form with the Secretary of State, and does
business within this state, as defined by Section 23101, during the
period in which the deduction allowed under this section is allowed.

(2) “Qualified income” means any income attributable to a
taxpayer’s status as a partner in or sole proprietor of a qualified
business.

SEC. 2.  

Section 17935 of the Revenue and Taxation Code is
amended to read:

17935.  

(a) For each taxable year beginning on or after January
1, 1997, every limited partnership doing business in this begin delete state (as end delete
begin insert state, as end insert defined by Section begin delete 23101) end delete begin insert 23101, end insert and required to file a
return under Section 18633 shall pay annually to this state a tax
for the privilege of doing business in this state in an amount equal
to the applicable amount specified in Section 23153.

(b) (1) In addition to any limited partnership that is doing
business in this state and therefore is subject to the tax imposed
by subdivision (a), for each taxable year beginning on or after
January 1, 1997, every limited partnership that has executed,
acknowledged, and filed a certificate of limited partnership with
the Secretary of State pursuant to Section 15621 or 15902.01 of
the Corporations Code, and every foreign limited partnership that
has registered with the Secretary of State pursuant to Section 15692
or 15909.01 of the Corporations Code, shall pay annually the tax
prescribed in subdivision (a). The tax shall be paid for each taxable
year, or part thereof, until a certificate of cancellation is filed on
behalf of the limited partnership with the office of the Secretary
of State pursuant to Section 15623, 15696, 15902.03, or 15909.07
of the Corporations Code.

(2) If a taxpayer files a return with the Franchise Tax Board that
is designated its final return, that board shall notify the taxpayer
that the tax imposed by this chapter is due annually until a
certificate of cancellation is filed with the Secretary of State
pursuant to Section 15623, 15696, 15902.03, or 15909.07 of the
Corporations Code.

(c) The tax imposed by this chapter shall be due and payable
on the date the return is required to be filed under former Section
18432 or 18633.

(d) For purposes of this section, “limited partnership” means
any partnership formed by two or more persons under the laws of
this state or any other jurisdiction and having one or more general
partners and one or more limited partners.

(e) Notwithstanding subdivision (b), any limited partnership
that ceased doing business prior to January 1, 1997, filed a final
return with the Franchise Tax Board for a taxable year ending
before January 1, 1997, and filed a certificate of dissolution with
the Secretary of State pursuant to Section 15623 of the
Corporations Code prior to January 1, 1997, shall not be subject
to the tax imposed by this chapter for any period following the
date the certificate of dissolution was filed with the Secretary of
State, but only if the limited partnership files a certificate of
cancellation with the Secretary of State pursuant to Section 15623
of the Corporations Code. In the case where a notice of proposed
deficiency assessment of tax or a notice of tax due (whichever is
applicable) is mailed after January 1, 2001, the first sentence of
this subdivision shall not apply unless the certificate of cancellation
is filed with the Secretary of State not later than 60 days after the
date of the mailing of the notice.

begin insert

(f) Notwithstanding subdivisions (a) and (b), every limited
partnership that files a certificate of limited partnership with the
Secretary of State on or after January 1, 2014, shall not be subject
to the tax imposed by this chapter for the first five consecutive
taxable years that it does business within this state, as defined by
Section 23101, and is required to file a return under Section 18633.

end insert

SEC. 3.  

Section 17941 of the Revenue and Taxation Code is
amended to read:

17941.  

(a) For each taxable year beginning on or after January
1, 1997, a limited liability company doing business in this begin delete state
(as end delete begin insert state, as end insert defined in Section begin delete 23101) end delete begin insert 23101, end insert shall pay annually
to this state a tax for the privilege of doing business in this state
in an amount equal to the applicable amount specified in
subdivision (d) of Section 23153 for the taxable year.

(b) (1) In addition to any limited liability company that is doing
business in this state and is therefore subject to the tax imposed
by subdivision (a), for each taxable year beginning on or after
January 1, 1997, a limited liability company shall pay annually
the tax prescribed in subdivision (a) if articles of organization have
been accepted, or a certificate of registration has been issued, by
the office of the Secretary of State. The tax shall be paid for each
taxable year, or part thereof, until a certificate of cancellation of
registration or of articles of organization is filed on behalf of the
limited liability company with the office of the Secretary of State.

(2) If a taxpayer files a return with the Franchise Tax Board that
is designated as its final return, the Franchise Tax Board shall
notify the taxpayer that the annual tax shall continue to be due
annually until a certificate of dissolution is filed with the Secretary
of State pursuant to Section 17707.08 of the Corporations Code
or a certificate of cancellation is filed with the Secretary of State
pursuant to Section 17708.06 of the Corporations Code.

(c) The tax assessed under this section shall be due and payable
on or before the 15th day of the fourth month of the taxable year.

(d) For purposes of this section, “limited liability company”
means an organization, other than a limited liability company that
is exempt from the tax and fees imposed under this chapter
pursuant to Section 23701h or Section 23701x, that is formed by
one or more persons under the law of this state, any other country,
or any other state, as a “limited liability company” and that is not
taxable as a corporation for California tax purposes.

(e) Notwithstanding anything in this section to the contrary, if
the office of the Secretary of State files a certificate of cancellation
pursuant to Section 17707.02 of the Corporations Code for any
limited liability company, then paragraph (1) of subdivision (f) of
Section 23153 shall apply to that limited liability company as if
the limited liability company were properly treated as a corporation
for that limited purpose only, and paragraph (2) of subdivision (f)
of Section 23153 shall not apply. Nothing in this subdivision
entitles a limited liability company to receive a reimbursement for
any annual taxes or fees already paid.

(f) (1) Notwithstanding any provision of this section to the
contrary, a limited liability company that is a small business solely
owned by a deployed member of the United States Armed Forces
shall not be subject to the tax imposed under this section for any
taxable year the owner is deployed and the limited liability
company operates at a loss or ceases operation.

(2) The Franchise Tax Board may promulgate regulations as
necessary or appropriate to carry out the purposes of this
subdivision, including a definition for “ceases operation.”

(3) For the purposes of this subdivision, all of the following
definitions apply:

(A) “Deployed” means being called to active duty or active
service during a period when a Presidential Executive order
specifies that the United States is engaged in combat or homeland
defense. “Deployed” does not include either of the following:

(i) Temporary duty for the sole purpose of training or processing.

(ii) A permanent change of station.

(B) “Operates at a loss” means a limited liability company’s
expenses exceed its receipts.

(C) “Small business” means a limited liability company with
total income from all sources derived from, or attributable, to the
state of two hundred fifty thousand dollars ($250,000) or less.

(4) This subdivision shall become inoperative for taxable years
beginning on or after January 1, 2018.

begin insert

(g) Notwithstanding any provision of this section to the contrary,
a limited liability company that files articles of organization with
the Secretary of State on or after January 1, 2014, shall not be
subject to the tax imposed under this section for the first five
consecutive taxable years that it does business within this state,
as defined by Section 23101.

end insert

SEC. 4.  

Section 17942 of the Revenue and Taxation Code is
amended to read:

17942.  

(a) In addition to the tax imposed under Section 17941,
every limited liability company subject to tax under Section 17941
shall pay annually to this state a fee equal to:

(1) Nine hundred dollars ($900), if the total income from all
sources derived from or attributable to this state for the taxable
year is two hundred fifty thousand dollars ($250,000) or more, but
less than five hundred thousand dollars ($500,000).

(2) Two thousand five hundred dollars ($2,500), if the total
income from all sources derived from or attributable to this state
for the taxable year is five hundred thousand dollars ($500,000)
or more, but less than one million dollars ($1,000,000).

(3) Six thousand dollars ($6,000), if the total income from all
sources derived from or attributable to this state for the taxable
year is one million dollars ($1,000,000) or more, but less than five
million dollars ($5,000,000).

(4) Eleven thousand seven hundred ninety dollars ($11,790), if
the total income from all sources derived from or attributable to
this state for the taxable year is five million dollars ($5,000,000)
or more.

(b) (1) (A) For purposes of this section, “total income from all
sources derived from or attributable to this state” means gross
income, as defined in Section 24271, plus the cost of goods sold
that are paid or incurred in connection with the trade or business
of the taxpayer. However, “total income from all sources derived
from or attributable to this state” shall not include allocation or
attribution of income or gain or distributions made to a limited
liability company in its capacity as a member of, or holder of an
economic interest in, another limited liability company if the
allocation or attribution of income or gain or distributions are
directly or indirectly attributable to income that is subject to the
payment of the fee described in this section.

(B) For purposes of this section, “total income from all sources
derived from or attributable to this state” shall be determined using
the rules for assigning sales under Sections 25135 and 25136 and
the regulations thereunder, as modified by regulations under
Section 25137, other than those provisions that exclude receipts
from the sales factor.

(2) In the event a taxpayer is a commonly controlled limited
liability company, the total income from all sources derived from
or attributable to this state, taking into account any election under
Section 25110, may be determined by the Franchise Tax Board to
be the total income of all the commonly controlled limited liability
company members if it determines that multiple limited liability
companies were formed for the primary purpose of reducing fees
payable under this section. A determination by the Franchise Tax
Board under this subdivision may only be made with respect to
one limited liability company in a commonly controlled group.
However, each commonly controlled limited liability company
shall be jointly and severally liable for the fee. For purposes of
this section, commonly controlled limited liability companies shall
include the taxpayer and any other partnership or limited liability
company doing business (as defined in Section 23101) in this state
and required to file a return under Section 18633 or 18633.5, in
which the same persons own, directly or indirectly, more than 50
percent of the capital interests or profits interests.

(c) The fee assessed under this section shall be due and payable
on the date the return of the limited liability company is required
to be filed under Section 18633.5, shall be collected and refunded
in the same manner as the taxes imposed by this part, and shall be
subject to interest and applicable penalties.

(d) (1) The fee imposed by this section shall be estimated and
paid on or before the 15th day of the sixth month of the current
taxable year.

(2) A penalty of 10 percent of the amount of any underpayment
shall be added to the fee. The underpayment amount shall be equal
to the difference between the total amount of the fee imposed by
this section for the taxable year less the amount paid under
paragraph (1) by the date specified in that paragraph. A penalty
shall not be imposed with respect to any fee estimated and paid
under this section if the amount paid by the date prescribed in this
subdivision is equal to or greater than the total amount of the fee
of the limited liability company for the preceding taxable year.

begin insert

(e) Notwithstanding subdivision (a), a limited liability company
that files articles of organization with the Secretary of State on or
after January 1, 2014, shall not be subject to the fee imposed under
this section for the first five consecutive taxable years that it does
business within this state, as defined by Section 23101.

end insert

SEC. 5.  

Section 17948 of the Revenue and Taxation Code is
amended to read:

17948.  

(a) For each taxable year beginning on or after January
1, 1997, every limited liability partnership doing business in this
state (as defined in Section 23101) and required to file a return
under Section 18633 shall pay annually to the Franchise Tax Board
a tax for the privilege of doing business in this state in an amount
equal to the applicable amount specified in paragraph (1) of
subdivision (d) of Section 23153 for the taxable year.

(b) In addition to any limited liability partnership that is doing
business in this state and therefore is subject to the tax imposed
by subdivision (a), for each taxable year beginning on or after
January 1, 1997, every registered limited liability partnership that
has registered with the Secretary of State pursuant to Section 16953
of the Corporations Code and every foreign limited liability
partnership that has registered with the Secretary of State pursuant
to Section 16959 of the Corporations Code shall pay annually the
tax prescribed in subdivision (a). The tax shall be paid for each
taxable year, or part thereof, until any of the following occurs:

(1) A notice of cessation is filed with the Secretary of State
pursuant to subdivision (b) of Section 16954 or 16960 of the
Corporations Code.

(2) A foreign limited liability partnership withdraws its
registration pursuant to subdivision (a) of Section 16960 of the
Corporations Code.

(3) The registered limited liability partnership or foreign limited
liability partnership has been dissolved and finally wound up.

(c) The tax assessed under this section shall be due and payable
on the date the return is required to be filed under Section 18633.

(d) If a taxpayer files a return with the Franchise Tax Board that
is designated as its final return, the Franchise Tax Board shall
notify the taxpayer that the annual tax shall continue to be due
annually until a certificate of cancellation is filed with the Secretary
of State pursuant to Section 16954 or 16960 of the Corporations
Code.

begin insert

(e) Notwithstanding subdivisions (a) and (b), a limited liability
partnership that files a certificate of limited partnership with the
Secretary of State on or after January 1, 2014, shall not be subject
to the tax imposed under this section for the first five consecutive
taxable years that it does business within this state, as defined by
Section 23101.

end insert

SEC. 6.  

Section 23153 of the Revenue and Taxation Code is
amended to read:

23153.  

(a) Every corporation described in subdivision (b) shall
be subject to the minimum franchise tax specified in subdivision
(d) from the earlier of the date of incorporation, qualification, or
commencing to do business within this state, until the effective
date of dissolution or withdrawal as provided in Section 23331 or,
if later, the date the corporation ceases to do business within the
limits of this state.

(b) Unless expressly exempted by this part or the California
Constitution, subdivision (a) shall apply to each of the following:

(1) Every corporation that is incorporated under the laws of this
state.

(2) Every corporation that is qualified to transact intrastate
business in this state pursuant to Chapter 21 (commencing with
Section 2100) of Division 1 of Title 1 of the Corporations Code.

(3) Every corporation that is doing business in this state.

(c) The following entities are not subject to the minimum
franchise tax specified in this section:

(1) Credit unions.

(2) Nonprofit cooperative associations organized pursuant to
Chapter 1 (commencing with Section 54001) of Division 20 of the
Food and Agricultural Code that have been issued the certificate
of the board of supervisors prepared pursuant to Section 54042 of
the Food and Agricultural Code. The association shall be exempt
from the minimum franchise tax for five consecutive taxable years,
commencing with the first taxable year for which the certificate
is issued pursuant to subdivision (b) of Section 54042 of the Food
and Agricultural Code. This paragraph only applies to nonprofit
cooperative associations organized on or after January 1, 1994.

(d) (1) Except as provided in paragraph (2), paragraph (1) of
subdivision (f) of Section 23151, paragraph (1) of subdivision (f)
of Section 23181, and paragraph (1) of subdivision (c) of Section
23183, corporations subject to the minimum franchise tax shall
pay annually to the state a minimum franchise tax of eight hundred
dollars ($800).

(2) The minimum franchise tax shall be twenty-five dollars
($25) for each of the following:

(A) A corporation formed under the laws of this state whose
principal business when formed was gold mining, which is inactive
and has not done business within the limits of the state since 1950.

(B) A corporation formed under the laws of this state whose
principal business when formed was quicksilver mining, which is
inactive and has not done business within the limits of the state
since 1971, or has been inactive for a period of 24 consecutive
months or more.

(3) For purposes of paragraph (2), a corporation shall not be
considered to have done business if it engages in business other
than mining.

(e) Notwithstanding subdivision (a), for taxable years beginning
on or after January 1, 1999, and before January 1, 2000, every
“qualified new corporation” shall pay annually to the state a
minimum franchise tax of five hundred dollars ($500) for the
second taxable year. This subdivision shall apply to any corporation
that is a qualified new corporation and is incorporated on or after
January 1, 1999, and before January 1, 2000.

(1) The determination of the gross receipts of a corporation, for
purposes of this subdivision, shall be made by including the gross
receipts of each member of the commonly controlled group, as
defined in Section 25105, of which the corporation is a member.

(2) “Gross receipts, less returns and allowances reportable to
this state,” means the sum of the gross receipts from the production
of business income, as defined in subdivision (a) of Section 25120,
and the gross receipts from the production of nonbusiness income,
as defined in subdivision (d) of Section 25120.

(3) “Qualified new corporation” means a corporation that is
incorporated under the laws of this state or has qualified to transact
intrastate business in this state, that begins business operations at
or after the time of its incorporation and that reasonably estimates
that it will have gross receipts, less returns and allowances,
reportable to this state for the taxable year of one million dollars
($1,000,000) or less. “Qualified new corporation” does not include
any corporation that began business operations as a sole
proprietorship, a partnership, or any other form of business entity
prior to its incorporation. This subdivision shall not apply to any
corporation that reorganizes solely for the purpose of reducing its
minimum franchise tax.

(4) This subdivision shall not apply to limited partnerships, as
defined in Section 17935, limited liability companies, as defined
in Section 17941, limited liability partnerships, as described in
Section 17948, charitable organizations, as described in Section
23703, regulated investment companies, as defined in Section 851
of the Internal Revenue Code, real estate investment trusts, as
defined in Section 856 of the Internal Revenue Code, real estate
mortgage investment conduits, as defined in Section 860D of the
Internal Revenue Code, qualified Subchapter S subsidiaries, as
defined in Section 1361(b)(3) of the Internal Revenue Code, or to
the formation of any subsidiary corporation, to the extent
applicable.

(5) For any taxable year beginning on or after January 1, 1999,
and before January 1, 2000, if a corporation has qualified to pay
five hundred dollars ($500) for the second taxable year under this
subdivision, but in its second taxable year, the corporation’s gross
receipts, as determined under paragraphs (1) and (2), exceed one
million dollars ($1,000,000), an additional tax in the amount equal
to three hundred dollars ($300) for the second taxable year shall
be due and payable by the corporation on the due date of its return,
without regard to extension, for that year.

(f) (1)  begin insert (A) end insert begin insert   end insert Notwithstanding subdivision (a), every corporation
that incorporates or qualifies to do business in this state on or after
January 1, 2000, shall not be subject to the minimum franchise tax
for its first taxable year.

begin insert

(B) Notwithstanding subdivision (a), every corporation that
incorporates in this state on or after January 1, 2014, shall not be
subject to the minimum franchise tax for its first five consecutive
taxable years.

end insert

(2) This subdivision shall not apply to limited partnerships, as
defined in Section 17935, limited liability companies, as defined
in Section 17941, limited liability partnerships, as described in
Section 17948, charitable organizations, as described in Section
23703, regulated investment companies, as defined in Section 851
of the Internal Revenue Code, real estate investment trusts, as
defined in Section 856 of the Internal Revenue Code, real estate
mortgage investment conduits, as defined in Section 860D of the
Internal Revenue Code, and qualified Subchapter S subsidiaries,
as defined in Section 1361(b)(3) of the Internal Revenue Code, to
the extent applicable.

(3) This subdivision shall not apply to any corporation that
reorganizes solely for the purpose of avoiding payment of its
minimum franchise tax.

(g) Notwithstanding subdivision (a), a domestic corporation, as
defined in Section 167 of the Corporations Code, that files a
certificate of dissolution in the office of the Secretary of State
pursuant to subdivision (b) of Section 1905 of the Corporations
Code, prior to its amendment by the act amending this subdivision,
and that does not thereafter do business shall not be subject to the
minimum franchise tax for taxable years beginning on or after the
date of that filing.

(h) The minimum franchise tax imposed by paragraph (1) of
subdivision (d) shall not be increased by the Legislature by more
than 10 percent during any calendar year.

(i) (1) Notwithstanding subdivision (a), a corporation that is a
small business solely owned by a deployed member of the United
States Armed Forces shall not be subject to the minimum franchise
tax for any taxable year the owner is deployed and the corporation
operates at a loss or ceases operation.

(2) The Franchise Tax Board may promulgate regulations as
necessary or appropriate to carry out the purposes of this
subdivision, including a definition for “ceases operation.”

(3) For the purposes of this subdivision, all of the following
definitions apply:

(A) “Deployed” means being called to active duty or active
service during a period when a Presidential Executive order
specifies that the United States is engaged in combat or homeland
defense. “Deployed” does not include either of the following:

(i) Temporary duty for the sole purpose of training or processing.

(ii) A permanent change of station.

(B) “Operates at a loss” means negative net income as defined
in Section 24341.

(C) “Small business” means a corporation with total income
from all sources derived from, or attributable, to the state of two
hundred fifty thousand dollars ($250,000) or less.

(4) This subdivision shall become inoperative for taxable years
beginning on or after January 1, 2018.

SEC. 7.  

Section 23701.1 is added to the Revenue and Taxation
Code, to read:

23701.1.  

A corporation that incorporates under the laws of this
state on or after January 1, 2014, shall be exempt from the taxes
imposed under this part for the first five consecutive taxable years
that it does business within this state, as defined by Section 23101.

SEC. 8.  

This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.