SB 104: Elective Tax and Small Business Relief Act

On January 5, Senators Mike McGuire and Anna Caballero introduced Senate Bill 104, which would create an “elective tax” for specified corporate entities. The bill would add and repeal California Revenue and Taxation Code (CRTC) Section 17132.9, as well as add and repeal Part 10.4 (commencing with Section 19900) of Division 2.

Existing California tax law pursuant to the CRTC imposes an annual tax on specified corporate entities. For tax years between January 1, 2021 and January 1, 2026, SB 104 would authorize specified limited partnerships, limited liability partnerships, limited liability companies, and “Subchapter S” corporations to elect to pay an annual elective tax at a rate based on its net income for the preceding taxable year.

For the same 5-year period, SB 104 would exclude from gross income for an individual partner, shareholder, or member of an entity that elects to pay the elective tax an amount equal to the partner, shareholder, or member’s pro rata share of the amount of the elective tax paid by the entity.

Section One of the bill would add CRTC Section 17132.9 to specify that, for the 5-years from 2021 through 2025 that “gross income” does not include the qualified amount paid by a qualified entity for the particular tax year. “Qualified amount,” “qualified entity,” and “qualified taxpayer” are defined. “Qualified taxpayer” is an individual who is a partner, shareholder, or member of a qualified entity and who is a resident, nonresident, or part-year resident.

There is included a legislative finding and declaration that “the goal of this exclusion is to provide tax relief to small businesses facing unprecedented economic hurtles due to COVID-19.” The section is repealed December 1, 2026.

Section Two of the bill would add Part 10.4 to Division 2 of the CRTC. Part 10.4 would be titled the “Small Business Relief Act.” During this 5-year period between 2021 through 2025, a qualified taxpayer doing business in California may elect to annually pay an elective tax according to or measured by its net income. The rate has not yet been set in the bill. The rate would be computed as a percent upon the basis of its net income for the last preceding taxable year.

Note that the elective tax authorized by this part is in addition to, and not in place of, any other tax required to be paid under Part 10. In addition, the determination by a qualified taxpayer of whether to elect to pay the elective tax authorized by this part is to be made at the entity level. All partners, shareholders, and members are be bound by the decision of the entity made with respect to this part for that taxable year.

A “qualified taxpayer” must (1) be an entity that is taxed as a partnership or “S” corporation and (2) the partners, shareholders, or members in that taxable year are exclusively individuals. It cannot include taxpayers in a combined reporting group. The determination of whether a taxpayer is a qualified taxpayer under this part is made at the entity level.

The elective tax must be paid on the original and timely filed return. The Franchise Tax Board is authorized to adopt any necessary rules, guidelines, procedures, or other guidance, which are to be exempt from the APA process. The section is repealed December 1, 2026.