SB 104: Electoral Tax and Small Enterprise Aid Act

On January 5, Senators Mike McGuire and Anna Caballero presented Senate Draft 104, which aims to introduce an “election tax” for certain businesses. The bill would add and remove Section 17132.9 of the California Revenue and Taxation Code (CRTC), and add and remove Section 10.4 (starting with Section 19900) of Division 2.

Existing California tax law under the CRTC imposes an annual tax on certain business units. For tax years between January 1, 2021 and January 1, 2026, SB 104 would authorize certain limited partnerships, limited partnerships, limited liability companies and corporations of sub-chapter S to pay an annual elective tax at a rate based on their annual net income for the previous tax year.

For the same five-year period, SB 104 would exclude, for an individual partner, shareholder or member of a company paying the election tax, an amount equal to the partner, shareholder or member’s proportionate share of the gross income amount of the election tax paid by the company.

Senator Anna M. Caballero. (Photo: Kevin Sanders for California Globe)

In Section 1 of the Bill, CRTC Section 17132.9 would be added to stipulate that for the 5 years from 2021 to 2025, “Gross Income” does not include the qualifying amount a Qualifying Company paid for the relevant tax year. “Qualified amount”, “Qualified Company” and “Qualified Taxpayer” are defined. “Qualified Taxpayer” means an individual who is a partner, shareholder, or member of a Qualifying Company who is city resident, non-resident, or partially resident for a year.

It includes a legislative statement and declaration that “The aim of this exclusion is to provide tax breaks to small businesses facing unprecedented economic problems due to COVID-19.” The section will be repealed on December 1, 2026.

Section 2 of the bill would add Part 10.4 to Division 2 of the CRTC. Part 10.4 would be titled “Small Business Relief Act”. During that five year period between 2021 and 2025, a qualified taxpayer doing business in California may choose to pay an election tax annually based on or based on net income. The tariff has not yet been specified in the invoice. The rate would be calculated as a percentage based on his net income for the last previous tax year.

Note that the election tax approved by this part is required in addition to, and not in place of, any other tax payable under Part 10. In addition, a qualified taxpayer must decide whether to opt to pay the approved election tax, this part should be done at the company level. All partners, shareholders and members are bound by the company’s decision made in relation to this part for the tax year.

A “Qualified Taxpayer” must be (1) a company that is taxed as a partnership or “S” company, and (2) the partners, shareholders or members in that tax year are all natural persons. Taxpayers cannot be included in a combined reporting group. The determination of whether a taxpayer is a qualified taxpayer under this Part is done at the company level.

The election tax must be paid on the original tax return submitted in good time. The Franchise Tax Board is authorized to issue any necessary rules, guidelines, procedures or other guidelines to be exempted from the APA process. The section will be repealed on December 1, 2026.

Chris Micheli is a lobbyist at Aprea & Micheli and an Associate Professor of Law at the McGeorge School of Law at the University of the Pacific.

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