BILL ANALYSIS �
AB 2466
Page 1
Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2466 (Nestande) - As Amended: May 15, 2014
Policy Committee: Revenue &
Taxation Vote: 7-1
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill reduces the minimum franchise tax, for taxable years
beginning on or after January 1, 2015 and before January 1,
2018, to $99 for a corporation or a limited liability company
(LLC) that is a new veteran-owned small business, and eliminates
the tax if the business operates at a loss or ceases operation.
The bill defines the following terms:
1)"New veteran-owned small business" as a veteran-owned
corporation or LLC organized on or after January 1, 2015, and
begins business operations on or after its organization date
and has total income derived from California of $250,000 or
less. The definition does not include a corporation or LLC
that began business operations as a sole proprietorship, a
partnership, or any other form of business entity prior to its
organization. This reduction does not apply to corporations
or LLCs that reorganize solely for the purpose of reducing its
minimum franchise tax.
2)"Veteran" as an individual honorably discharged from the Armed
Forces of the United States.
3)"Veteran-owned corporation" as a corporation or LLC in which
stock or membership interests representing more than 50% of
the voting power of the corporation or LLC and representing
more than 50% value of the stock or membership interests of
the corporation or LLC is owned by one or more veterans.
FISCAL EFFECT
1)Potentially significant GF costs to Franchise Tax Board (FTB)
AB 2466
Page 2
to administer the changes to forms and systems.
2)Estimated GF revenue decreases in the tens of millions of
dollars annually over the duration of the bill.
COMMENTS
1) Purpose. According to the author, veterans returning home
from active duty face unusual challenges, and suffer higher
unemployment rates than the civilian population. The author
contends one solution to this problem is to reduce some of the
costs of starting a new business. California's minimum
franchise tax is among the highest in the country, and this
bill reduces that tax from $800 to $99 for any veteran owned
new small business during the first three years of its
existence during which it is not profitable. The author
believes that by doing this, California will show a small
token of appreciation for its veterans while helping small
businesses become profitable and create jobs.
2) Existing Law. California imposes a minimum franchise tax of
$800 on all corporations and an equivalent tax of $800 on 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. 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
AB 2466
Page 3
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.
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 currently pending in this committee.
c) AB 2244 (Chau) of 2014 reduces the minimum franchise tax
for dormant and inactive businesses. AB 2244 is currently
pending in this committee.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081