This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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September 1999

As part of the 1999-2000 California State Budget adopted on June 15-16, the Legislature and Governor Gray Davis enacted important tax relief for individuals and businesses, including $295 million worth of budget-year tax cuts.

The tax relief package is contained in several pieces of legislation that cleared the Legislature as so-called budget "trailer bills" and were signed into law. This article provides a summary, including the fine print, of these changes in California tax law.

Minimum Franchise Tax
This measure, AB 10 (Correa) (Chapter 64, Statutes of 1999) eliminates the corporate minimum franchise tax for the first two years of incorporation. In last year's AB 2798 (Stats. 1998, Ch. 323), the minimum franchise tax was decreased from $600 to $300 for the first year and to $500 (instead of $800) in the second year, for any corporation formed on or after January 1, 1999.

Now, for any corporation formed on or after January 1, 2000, a new corporation will not pay any minimum franchise tax for their first two years of incorporation. A "qualified new corporation" does not include any business that began as another form of entity prior to incorporation, or one that has gross receipts of $1 million or more. The bill amended CRTC § 23153 and 23221. This provision had been contained in AB 10, as well as SB 37 (Baca), SB 40 (Brulte), and SB 42 (Speier).

Self-Employed Health Insurance Premiums
This measure, AB 1107 (Cedillo) (Ch. 146), conforms to federal law on the deduction for health insurance premiums paid by self-employed individuals. In last year's tax relief legislation (AB 2798), California increased the deduction from 25 percent to 40 percent for tax years beginning on or after January 1, 1999.

Now, California has conformed to Internal Revenue Code § 162 (l)(1). The bill amended CRTC § 17273 to provide that Section 2002 of the Tax and Trade Relief Extension Act of 1998 (P.L. 105-277) is applicable. It is effective for tax years beginning on or after January 1, 1999. This provision had been contained in SB 42 (Speier) and AB 430 (Davis).

Capital Gains Exclusion
State law provided a 50 percent exclusion from income of any gain from the sale or exchange of qualified small business stock held for more than five years that was acquired at its original issuance on or after August 10, 1993, and before January 1, 1999. The bill, AB 1120 (Havice) (Ch. 69) deleted the January 1, 1999 sunset date, thereby making the partial exclusion permanent. The corporation issuing the stock must be doing business in California at all times on or after July 1, 1993, have at least 80 percent of its payroll attributable to employment in California, and use at least 80 percent of its assets in California. It amended CRTC § 18152.5 and it partially conforms to IRC § 1202. This provision had been contained in SB 30 (Peace).

Vehicle License Fee (Car Tax)
AB 1121 (Nakano) (Ch. 74) accelerates the next scheduled reduction in the Vehicle License Fee (VLF). It does so for vehicle license fees with a final due date during the 2000 calendar year. This 10 percent reduction is in addition to the current 25 percent reduction. It applies for one year only, unless the "triggers" are reached for additional reductions. The bill amended CRTC § 10754. This provision had not previously been contained in pending legislation. However, it was proposed in early May by the Senate and Assembly Republican Caucuses.

The VLF law establishes, in lieu of any ad valorem property tax upon vehicles, an annual license fee for any vehicle subject to registration in California in the amount of 2 percent of the market value of that vehicle. Existing law permanently offsets the amount of the VLF for each vehicle by 25 percent and, subject to specified contingencies with respect to fiscal year projections of General Fund revenues, provides for the implementation of similar, superseding offsets of 35 percent, 46.5 percent, 55 percent, and 67.5 percent to apply to specified future calendar years.

Chris Micheli is an attorney and registered lobbyist for the Sacramento governmental relations firm of Carpenter Snodgrass & Associates. He is a frequent contributor to tax periodicals on California tax law developments.

VLF: Out-of-State Trucks
This measure, SB 688 (Burton) (Ch. 76) subjects internationally registered vehicles to the VLF reductions enacted in 1998 (AB 2797, Stats. 1998, Ch. 322) and this year (AB 1121). It requires the Department of Motor Vehicles to apply the VLF offsets to motor vehicle license fees that will become due and payable in 1999 with respect to internationally registered vehicles, which are trucks subject to the International Registration Program described in Vehicle Code § 8052. The bill adds CRTC § 10754.1. This provision had been contained in AB 852 (Oller).

Research and Development
SB 705 (Sher) (Ch. 77) increases the research and development tax credit from the current 11 percent to 12 percent for tax years beginning on or after January 1, 1999. California law references IRC § 41 to allow a credit against taxes for increasing research expenses. It is currently 11 percent of the excess of the qualified research expenses for the taxable or income year over the base amount. It amends CRTC §§ 17052.12 and 23609. This provision had been contained in AB 68 (Cunneen/Alquist).