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AB-820 Corporation Tax Law: banks and financial corporations: exclusions: interest income.(2021-2022)

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Date Published: 03/18/2021 09:00 PM
AB820:v98#DOCUMENT

Amended  IN  Assembly  March 18, 2021

CALIFORNIA LEGISLATURE— 2021–2022 REGULAR SESSION

Assembly Bill
No. 820


Introduced by Assembly Member Cooley

February 16, 2021


An act to amend Section 44559.1 of the Health and Safety Code, relating to economic development. An act to add Sections 24313.5 and 25128.1 to the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.


LEGISLATIVE COUNSEL'S DIGEST


AB 820, as amended, Cooley. Capital Acess Loan Program: small businesses. Corporation Tax Law: banks and financial corporations: exclusions: interest income.
The Corporation Tax Law imposes on every bank and specified financial corporations doing business in the state a tax according to or measured by net income, as provided. That law defines net income as gross income, computed as provided, less allowable deductions. That law also provides various exclusions from gross income.
Under that law, when the income of a taxpayer subject to a tax under the Corporation Tax Law is derived from or attributable to sources both within and without the state, the tax is required to be measured by the net income derived from or attributable to sources within the state in accordance with specified procedures. Under that law, in the case of an apportioning trade or business that derives more than 50% of its gross business receipts from conducting one or more qualified business activities, which includes savings and loan activities and banking or financial business activities, business income is apportioned in accordance with a 3-factor formula. Under the 3-factor formula, the specified apportioning trade or business is required to multiply business income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3. Existing law requires any bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.
This bill would require, for taxable years beginning on or after January 1, 2021, a qualified taxpayer that apportions its business income under the 3-factor formula described above to exclude the amount of qualified interest income from its calculation of the sales factor under the 3-factor formula. The bill would define a qualified taxpayer as a bank or financial corporation, as defined, that generates business income that is derived from or attributable to sources within and without this state and that is determined pursuant to the 3-factor formula. The bill would define qualified interest income as interest revenue that a qualified taxpayer generates on a qualified loan, as defined, during the applicable taxable year and that would be subject to apportionment under the 3-factor formula but for the application of the bill’s provisions.
This bill would also provide that, for taxable years beginning on or after January 1, 2021, gross income does not include the amount of qualified interest income, which is defined as interest revenue that a qualified taxpayer generates on a qualified loan during the taxable year, generated by the qualified taxpayer. The bill would define a qualified taxpayer for this purpose as a bank or financial corporation that generates business income that is solely derived from or attributable to sources within this state.
This bill would provide findings to comply with the additional information requirement for any bill authorizing a new tax expenditure.
This bill would take effect immediately as a tax levy.

Existing law establishes the Capital Access Loan Program, which is administered by the California Pollution Control Financing Authority. Existing law authorizes the authority to contract with a financial institution for the purpose of allowing the financial institution to participate in the Capital Access Loan Program. Existing law defines various terms for purposes of the program.

This bill would make a nonsubstantive change to those definitions.

Vote: MAJORITY   Appropriation: NO   Fiscal Committee: NOYES   Local Program: NO  

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


SECTION 1.

 Section 24313.5 is added to the Revenue and Taxation Code, to read:

24313.5.
 (a) For taxable years beginning on or after January 1, 2021, gross income does not include the amount of qualified interest income generated by a qualified taxpayer.
(b) For purposes of this section, the following definitions shall apply:
(1) “Full-time equivalent” means the workload of the full-time equivalent job is comparable to one year of full-time work.
(2) “Qualified interest income” means interest revenue that a qualified taxpayer generates on a qualified loan during the applicable taxable year.
(3) “Qualified loan” means a loan of one million dollars ($1,000,000) or less that is made by the qualified taxpayer to a qualified small business on or after March 15, 2020, but prior to January 1, 2025.
(4) “Qualified small business” means a business that meets both of the following requirements:
(A) Has 50 or fewer full-time or full-time equivalent employees on the date of the loan application to the qualified taxpayer.
(B) Experienced an annual loss in net revenue of 10 percent or more since March 15, 2020.
(C) Is located in the state.
(5) “Qualified taxpayer” means a bank or financial corporation, as those terms are used in Article 3 (commencing with Section 23181) of Chapter 2 of this part, that generates business income that is solely derived from or attributable to sources within this state and is therefore not subject to apportionment pursuant to subdivision (b) of Section 25128.

SEC. 2.

 Section 25128.1 is added to the Revenue and Taxation Code, to read:

25128.1.
 (a) Notwithstanding subdivision (b) of Section 25128, for taxable years beginning on or after January 1, 2021, a qualified taxpayer that apportions its business income under subdivision (b) of Section 25128 shall exclude the amount of qualified interest income from its calculation of the sales factor under subdivision (b) of that section.
(b) For purposes of this section, the following definitions shall apply:
(1) “Full-time equivalent” means the workload of the full-time equivalent job is comparable to one year of full-time work.
(2) “Qualified interest income” means interest revenue that a qualified taxpayer generates on a qualified loan during the applicable taxable year and that would be subject to apportionment under subdivision (b) of Section 25128 but for the application of this section.
(3) “Qualified loan” means a loan of one million dollars ($1,000,000) or less that is made by the qualified taxpayer to a qualified small business on or after March 15, 2020, but prior to January 1, 2025.
(4) “Qualified small business” means a business that meets both of the following requirements:
(A) Has 50 or fewer full-time or full-time equivalent employees on the date of the loan application to the qualified taxpayer.
(B) Experienced an annual loss in net revenue of 10 percent or more since March 15, 2020.
(C) Is located in the state.
(5) “Qualified taxpayer” means a bank or financial corporation, as those terms are used in Article 3 (commencing with Section 23181) of Chapter 2 of this part, that generates income that is derived from or attributable to sources within and without this state and that is determined pursuant to subdivision (b) of Section 25128.

SEC. 3.

 For purposes of complying with Section 41 of the Revenue and Taxation Code, with respect to Sections 24313.5 and 25128.1 of the Revenue and Taxation Code, as added by this act (hereafter “the tax benefits”), the Legislature finds and declares all of the following:
(a) The specific goal, purpose, and objective that the tax benefits will achieve is to encourage financial institutions to issue loans to small businesses in the state.
(b) Detailed performance indicators for the Legislature to use in determining whether the tax benefits meet the goal, purpose, and objective described in subdivision (a) is the amount of qualified interest income, as defined in Section 25128.1 of the Revenue and Taxation Code, excluded from business income apportionment calculations, the number of banks and financial corporations using the tax benefits to apportion business income, and the number of banks and financial corporations excluding qualified interest income, as defined in Section 24313.5 of the Revenue and Taxation Code, from gross income.
(c) The Legislative Analyst’s Office shall collaborate with the Franchise Tax Board to analyze whether the tax benefits meet the goal, purpose, and objective described in subdivision (a) and shall issue, in compliance with Section 9795 of the Government Code and by December 1, 2025, a report on the analysis to the Legislature.
(d) The data collection requirements for determining whether the tax benefits meet the specific goal, purpose, and objective described in subdivision (a) are:
(1) To assist the Legislature in determining whether the tax benefits meet the specific goal, purpose, and objective described in subdivision (a), and in order to carry out its duties pursuant to subdivision (c), the Legislative Analyst’s Office may request information from the Franchise Tax Board.
(2) (A) The Franchise Tax Board shall provide any available data requested by the Legislative Analyst’s Office pursuant to this subdivision.
(B) The disclosure provisions of this paragraph shall be treated as an exception to Section 19542 under Article 2 (commencing with Section 19542) of Chapter 7 of Part 10.2 of Division 2 of the Revenue and Taxation Code.

SEC. 4.

 This act provides for a tax levy within the meaning of Article IV of the California Constitution and shall go into immediate effect.
SECTION 1.Section 44559.1 of the Health and Safety Code is amended to read:
44559.1.

As used in this article, unless the context requires otherwise, the following terms have the following meanings:

(a)“Authority” means the California Pollution Control Financing Authority.

(b)“California Capital Access Fund” means a fund created within the authority to be used for purposes of the program.

(c)“Executive director” means the Executive Director of the California Pollution Control Financing Authority.

(d)(1)“Financial institution” means a federal- or state-chartered bank, savings association, credit union, not-for-profit community development financial institution certified under Part 1805 (commencing with Section 1805.100) of Chapter XVIII of Title 12 of the Code of Federal Regulations, or a consortium of these entities. A consortium of those entities may include a nonfinancial corporation, if the percentage of capitalization by all nonfinancial corporations in the consortium does not exceed 49 percent.

(2)(A)“Financial institution” also includes a lending institution that has executed a participation agreement with the Small Business Administration under the guaranteed loan program pursuant to Part 120 (commencing with Section 120.1) of Chapter I of Title 13 of the Code of Federal Regulations and meets the requirements of Section 120.410 of Chapter I of Title 13 of the Code of Federal Regulations, a small business investment company licensed pursuant to Part 107 (commencing with Section 107.20) of Chapter I of Title 13 of the Code of Federal Regulations, and a small business financial development corporation, as defined in Chapter 1 (commencing with Section 14000) of Part 5 of Division 3 of Title 1 of the Corporations Code, or microbusiness lender, as defined in Section 12100 of the Government Code, that meets standards that shall be established by the authority. For loans where all or part of the fees and matching contributions are paid by an entity participating in the program pursuant to subdivision (e) of Section 44559.2, “financial institution” also includes financial lenders, as defined in Section 22009 of the Financial Code, making commercial loans, as defined in Section 22502 of the Financial Code.

(B)A financial institution described in this paragraph shall be domiciled or have its principal office in the State of California.

(3)“Financial institution” also includes an insured depository institution, insured credit union, or community development financial institution, as these terms are defined in Section 4702 of Title 12 of the United States Code.

(e)“Loss reserve account” means an account in the State Treasury or any financial institution that is established and maintained by the authority for the benefit of a financial institution participating in the Capital Access Loan Program established pursuant to this article for the purposes of the following:

(1)Depositing all required fees paid by the participating financial institution and the qualified business.

(2)Depositing contributions made by the state and, if applicable, the federal government or other sources.

(3)Covering losses on enrolled qualified loans sustained by the participating financial institution by disbursing funds accumulated in the loss reserve account.

(f)“Participating financial institution” means a financial institution that has been approved by the authority to enroll qualified loans in the program and has agreed to all terms and conditions set forth in this article and as may be required by any applicable federal law providing matching funding.

(g)“Passive real estate ownership” means ownership of real estate for the purpose of deriving income from speculation, trade, or rental, but does not include any of the following:

(1)The ownership of that portion of real estate being used or intended to be used for the operation of the business of the owner of the real estate.

(2)The ownership of real estate for the purpose of construction or renovation, until the completion of the construction or renovation phase.

(h)“Program” means the Capital Access Loan Program created pursuant to this article.

(i)“Qualified business” means a small business concern that meets both of the following criteria, regardless of whether the small business concern has operations that affect the environment:

(1)It is a corporation, partnership, cooperative, or other entity, whether that entity is a nonprofit entity or an entity established for profit, that is authorized to conduct business in the state.

(2)It has its primary business location within the boundaries of the state.

(j)(1)“Qualified loan” means a loan or a portion of a loan made by a participating financial institution to a qualified business for any business activity that has its primary economic effect in California. A qualified loan may be made in the form of a line of credit, in which case the participating financial institution shall specify the amount of the line of credit to be covered under the program, which may be equal to the maximum commitment under the line of credit or an amount that is less than that maximum commitment. A qualified loan made under the program may be made with the interest rates, fees, and other terms and conditions agreed upon by the participating financial institution and the borrower.

(2)“Qualified loan” does not include any of the following:

(A)A loan for the construction or purchase of residential housing.

(B)A loan to finance passive real estate ownership.

(C)A loan for the refinancing of an existing loan when and to the extent that the outstanding balance is not increased.

(D)A loan, the proceeds of which will be used in any manner that could cause the interest on any bonds previously issued by the authority to become subject to federal income tax.

(k)“Severely affected community” means any area classified as an enterprise zone pursuant to the Enterprise Zone Act (Chapter 12.8 (commencing with Section 7070) of Division 7 of Title 1 of the Government Code), any area, as designated by the executive director, contiguous to the boundaries of a military base designated for closure pursuant to Section 2687 of Title 10 of the United States Code, as amended, and any other comparable economically distressed geographic area so designated by the executive director from time to time.

(l) “Small Business Assistance Fund” means a fund created within the authority pursuant to Section 44548.

(m)“Small business concern” has the same meaning as in Section 632 of Title 15 of the United States Code, or as otherwise provided in regulations of the authority.