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1997 Annual Report - Bank and Corporation Tax

Introduction

The Bank and Corporation Program accounted for 11.2 percent of California's General Fund revenue. The program includes all banks and corporations incorporated or qualified to do business in California and those doing business in, or deriving income from California, but not incorporated or qualified to do business in California. All of these entities file returns on a single, domestic/worldwide combined or water's-edge combined basis. For the 1996 income year, 430,796 California banks and corporations (not including exempt organizations) filed returns and paid nearly $4.9 billion in tax. This represents a 2.6 percent increase in the tax from 1995.

Data Sources

Data appearing in the text portion of this report and the Bank and Corporation Appendix are based on a stratified random sample of corporate tax returns. The sample includes all banks and corporation returns with state net income or loss greater than $5 million, all returns reporting total receipts or assets of $50 million or more, and a stratified random selection of approximately 2 percent of all other corporations with state net income or loss of less than $5 million.

The 1996 sample included 5,450 large banks and corporations and 7,304 other banks and corporations. The tables in this section and in the statistical appendix provide summary statistics for all banks and corporations.

Taxation of Banks and Corporations

A corporation is a separate entity for tax purposes, even though it is owned and controlled by individuals or other entities. Corporations doing business or incorporated in California must pay a franchise tax equal to the greater of the minimum franchise tax of $800 or an amount measured by their net income multiplied by the current tax rate.

Other corporations deriving income from California sources, but not sufficiently present to be classified as doing business in California, must pay income tax on California source income using the same rate as the franchise tax rate.

Most California banks and corporations file Form 100, Corporation Franchise or Income Tax Return. However, S corporations file Form 100S. Exempt organizations file Forms 199, 109 and/or 100, depending on each organization’s circumstances.

Returns Filed

Of the 430,796 returns filed for 1996, 1.7 percent had state net income that exceeded $1 million (see Appendix C, Table 2). These corporations accounted for 81.1 percent of the total taxes paid by all corporations. Corporations with less than $25,000 in state net income comprised 74.8 percent of all returns filed, yet accounted for only 5.9 percent of taxes paid. Corporations with negative income accounted for 36.2 percent of the total returns filed, reporting $28.7 billion in losses, a decrease of 10.7 percent from 1995.

Bank and Corporation Tax: Net Income, Adjustments and Taxes*

Item

1995

1995

Percent Change

Number Of Returns

Amount(Thousands)

Number Of Returns

Amount(Thousands)

Total Income

380,345

$ 3,258,193,634

393,295

$ 4,260,598,328

30.8

Deductions

400,951

2,828,865,397

412,068

3,750,061,660

32.6

Net Income(Before State Adjustments)

392,761

$ 429,328,237

404,118

$ 510,536,668

18.9

State Adjustments

Additions

Subtractions

401,033

173,455

127,574,844

193,567,373

414,094

184,785

201,285,532

272,709,715

57.8

40.9

Net Income(After State Adjustments)

401,290

$ 363,335,708

413,306

$ 439,112,485

20.9

State Net Income

Nonapportioning Corporations

Apportioning Corporations

386,070

32,192

$ 5,622,326

37,362,199

395,635

35,161

$ 7,795,989

39,468,199

38.7

5.6

Total State Net Income

Taxable Loss

Taxable Profit

418,262

178,887

239,375

$ 42,984,525

-25,942,984

68,927,509

430,796

179,059

251,737

$ 47,264,188

-28,725,061

75,989,249

10.0

-10.7

10.2

Net Operating Loss**

67,466

$ 5,171,909

75,772

$ 5,192,192

0.4

Taxable Income

418,262

$ 37,812,616

430,796

$ 42,071,996

11.3

Tax

418,262

$ 5,345,322

430,796

$ 5,691,795

6.5

Tax Credits

8,591

666,430

8,998

907,708

36.2

Alternative Minimum Tax

2,268

68,446

2,651

92,306

34.9

Built-in Gains Tax/Excess Net Passive Income Tax and Other Adjustments

667

9,753

428

5,274

-45.9

Total Tax Liability

418,262

$ 4,757,092

430,796

$ 4,881,666

2.6

Estimated Tax Payments

307,884

$ 4,560,278

322,348

$ 4,695,463

3.0

Other Prepayments

71,659

$ 1,040,820

66,990

$ 1,372,262

31.8

Final Payments

149,834

$ 889,570

157,421

$ 1,011,150

13.7

Overpayments

76,882

$ 1,733,576

84,129

$ 2,197,209

26.7

* Totals may not add due to rounding.

** Includes the deduction allowed to S corporations for built-in gains and passive investment income under Revenue and Taxation Code Section 23802(e). These items of income are separately taxed at the C corporation rate rather than the S corporation rate.

S Corporations

Certain corporations, defined in part as those with no more than 35 shareholders, may elect federal S corporation status. The benefits of such an election are the limited liability of a corporation and tax advantages similar to those enjoyed by a partnership. For California, S corporations must pay a corporate tax of 1.5 percent, which may not be less than the minimum franchise tax of $800. Income is also "passed through" to the individual shareholders and is taxable to them.

California corporations that elect federal S corporation status are deemed to have made a California S election on the same date as the federal S election, unless they elect C corporation (regular taxable corporation) status for California. The federal S election, as well as any California elections to be treated as a C corporation or to return to S corporation status, must be reported to the Franchise Tax Board using form FTB 3560, S Corporation Election or Termination/Revocation.

S corporations must file Form 100S, California S Corporation Franchise or Income Tax Return.

If the S corporation has any nonresident shareholders or fiduciaries, it must include with the return the consents of the nonresidents to be subject to the jurisdiction of the State of California to tax their pro rata share of S corporation income attributable to California sources. Failure to attach such consents may cause FTB to revoke the S corporation status.

For the 1996 income year, 125,677 corporations filed as S corporations and paid a total tax of $308.8 million. Appendix C, Table 6 contains additional data about S corporations.

Bank and Corporation Tax: Sources of Income*

1995

1996

Percent Change

Number Of Returns

Amount (Thousands)

Number Of Returns

Amount (Thousands)

Gross Receipts

333,854

$ 14,941,092,717

347,795

$ 14,571,470,676

-2.5

Less Cost of Goods Sold

201,399

$ 12,839,428,351

203,172

$ 12,087,556,179

-5.9

Gross Profit

334,327

$ 2,101,664,366

348,456

$ 2,483,914,497

18.2

Other Income

Dividends

27,308

145,471,729

29,926

218,327,750

50.1

Interest on Obligations

56,673

58,475,043

64,812

67,432,848

15.3

Other Interest

160,081

441,625,388

155,796

779,205,594

76.4

Gross Rents

26,177

80,833,920

24,864

95,968,175

18.7

Gross Royalties

4,515

48,180,541

4,960

55,536,925

15.3

Capital Gain (Loss)

18,352

41,366,366

18,657

43,722,252

5.7

Ordinary Gain (Loss)

52,352

11,671,112

53,623

22,249,474

90.6

Net Gain (Loss)

17,620

2,923,055

24,552

5,284,660

80.8

Other Income

153,043

311,094,818

158,149

476,720,713

53.2

Net Income from Rental Real Estate

7,763

-129,239

11,431

251,954

-295.0

Net Income from Other Rental Activity

1,557

-68,684

1,673

252,324

-467.4

Other Portfolio Income

608

96,194

857

90,141

-6.3

Miscellaneous

2,571

14,989,025

1,117

11,641,021

-22.3

Total Income

380,345

$ 3,258,193,634

393,295

$ 4,260,598,328

30.8

* Totals may not add due to rounding.

Exempt Organizations

Certain organizations, both incorporated and unincorporated, are exempt from corporate tax. These exempt organizations are organized and operated for nonprofit purposes and have been granted exempt status under the law. They include churches, charitable and educational organizations, civic leagues, social clubs, fraternal societies and others.

Churches or religious orders and organizations with gross receipts normally less than $25,000 are not required to file returns. However, other private foundations are required to file returns even if gross receipts are less than $25,000.

Those organizations required to file must file one or more of the following: Form 199, Exempt Organization Annual Information Statement or Return; Form 100, California Franchise or Income Tax Return; or Form 109, Exempt Organization Business Income Tax Return. For 1996, based on the return processing master file, there were a total of 135,890 active exempt organizations, of which 75,637 filed returns.

Accounting Periods

Banks and corporations file returns on either a calendar or fiscal-year basis. All returns are due no later than two-and-a-half months after the accounting period ends. FTB automatically grants filing date extensions for seven months. For the 1996 income year, 60.5 percent of corporations reporting state net income filed returns with an accounting period ending December 31 and 8.4 percent filed with an accounting period ending June 30 (see Appendix C, Table 4).

Income and Deductions

Most corporations doing business in California report income and deductions on a domestic basis. If they operate internationally and have not elected to file on a water’s-edge basis then they file on a worldwide basis. Reported income is then apportioned to California or elsewhere.

Corporations reported almost $4.3 trillion in total income for 1996. This amount is a combination of gross receipts ($14.6trillion) less the cost of goods sold ($12.1 trillion) plus other income. Other income, which totaled nearly $1.8 trillion, includes dividends, interest, rents, royalties, capital gains and other miscellaneous items.

Total deductible expenses were nearly $3.8 trillion for 1996. The largest single expense was for the category of "other deductions" at $1,170.6 billion, followed by "interest" at $756.0 billion and "salaries and wages" at $755.9 billion. The "other deductions" category includes deductions for administrative expenses, sales discounts, travel and entertainment expenses, and losses resulting from theft, fire, storm, unallocated expenses, etc.

California corporations may report federal income and deductions on their California return. However, certain adjustments must be made to reflect differences between federal and California tax laws. Typical California adjustments include the disallowance of the federal deduction for taxes on or measured by income, the inclusion of interest received on government obligations (except for corporations subject to only the income tax), the exclusion of intercompany dividends to the extent they were paid from unitary companies that were included in a combined report, and the exclusion of dividends paid out of income previously subject to California corporate franchise or income tax.

Bank and Corporation Tax: Deductions by Type*

Item

1995

1996

Percent Change

Number Of Returns

Amount (Thousands)

Number Of Returns

Amount (Thousands)

Compensation of Officers

225,142

78,300,064

238,173

86,510,056

10.5

Salaries and Wages

232,019

588,462,224

238,559

755,796,908

28.4

Repairs

222,512

52,244,348

240,608

58,553,057

12.1

Bad Debts

78,441

41,063,704

74,541

102,528,481

149.7

Rents

264,840

104,894,518

270,866

125,056,576

19.2

Taxes

380,334

128,951,703

398,427

155,973,385

21.0

Interest

216,104

509,672,047

228,403

755,982,011

48.3

Contributions

86,665

4,403,018

91,337

5,008,114

13.7

Depreciation/Amortization

296,090

207,977,548

304,927

267,607,459

28.7

Depletion

1,197

4,383,471

1,180

5,486,713

25.2

Advertising

212,956

99,113,622

217,760

123,919,219

25.0

Pension/Profit Sharing Plans

66,990

46,488,125

74,644

36,633,829

-21.2

Employee Benefit Plans

105,279

79,139,859

116,811

94,005,291

18.8

Other Deductions

395,437

866,608,882

408,480

1,170,626,076

35.1

Recovery Property

25,784

184,953

29,881

209,715

13.4

Portfolio Income

957

14,424

2,207

65,818

356.3

Interest on Investment Debts

852

38,335

2,265

121,904

218.0

Miscellaneous Deductions

4,151

16,924,552

2,184

5,977,048

-64.7

Total Returns with Deductions

400,951

2,828,865,397

412,068

3,750,061,660

32.6

* Totals may not add due to rounding.

Unitary Method

The phrase "income attributable to California" refers to situations in which a corporation does business both within and outside of California and its operations outside of California are "unitary" with the business activity within California. This connection can take several forms that convey a high degree of interdependence between operations, such as centralized decision making, purchasing, selling, accounting and financing. In such cases, California’s share of total income is determined by application of a formula that is based on three factors: property, payroll, and sales.

Beginning in 1993, legislation was enacted that requires the use of a "double weighted" sales factor. Generally, once the apportionment factors have been determined, the average is applied in determining the income attributable to California.

Apportionment of Income

Corporations that are doing business both within and outside of California are required to file Schedule R, Apportionment and Allocation of Income. Nonbusiness income (attributable to transactions not considered to be an integral part of the regular business operation) from intangible property is generally allocated entirely to the state of commercial domicile. Nonbusiness income from tangible property is allocated to the state where the property is physically located. The sum of the applicable nonbusiness income items and business income attributable to California by the apportionment formula constitutes the amount of a corporation’s entire net income subject to tax. For 1996 there were 40,622 corporations with apportioned multistate and/or multinational activity that resulted in $39.5 billion in state net income.

The apportionment formula (property, payroll and double weighted sales) is applied to the total business income to determine the portion taxable in California. For each factor, the ratio of the amount within California to the total amount within and outside of California is calculated. The average of the factors constitutes the apportionment percentage.

California property valuation totaled $711 billion (excluding banks and other financial corporations) for all apportioning corporations, representing 11.3 percent of the total property value for apportioning corporations. California wages and salaries amounted to $159 billion, or 12.9 percent of the total payroll. California sales amounted to $867 billion or 8.6 percent of the total sales. The net effect of the factors for corporations was an average apportionment of 10.4 percent of unitary income to California. This compares to 11.1 percent in 1995.

Bank and Corporation Tax: Apportionment Formula*

Item

1995 Income Year 1996 Income Year

Percent Change

Number of Returns

Amount (Thousands)

Number of Returns

Amount (Thousands)

Total Property Values

Within and Outside of California

Within California

34,779

25,291

5,572,810,303

636,727,365

36,072

26,201

6,309,085,006

710,651,884

13.2

11.6

Statewide Average Property Factor

11.4%

11.3%

Total Payroll (Wages and Salaries)

Within and Outside of California

Within California

32,822

23,996

1,037,333,060

136,614,781

34,787

25,852

1,229,309,706

159,011,261

18.5

16.4

Statewide Average Payroll Factor

13.2%

12.9%

Total Sales

Within and Outside of California

Within California

36,047

28,977

7,443,114,432

735,910,659

38,221

32,209

10,077,812,521

867,084,100

35.4

17.8

Statewide Average Sales Factor

9.9%

8.6%

Overall Average Apportionment Factor

38,788

11.1%

40,622

10.4%

* Excludes banks and other financial corporation returns.

Tax Rates and Minimum Tax

For 1996, the franchise tax rate and the income tax rate for all corporations other than S corporations was 9.3 percent. For S corporations the tax rate was 1.5 percent. Banks and financial corporations were required to pay an additional in-lieu tax of 2.0 percent. This in-lieu tax is imposed to adjust for exemptions from certain local levies that are allowed to banks and financial corporations. Thus, the composite tax rate was 3.5 percent for financial S corporations and 11.3 percent for banks and other financial corporations not electing S corporation status.

All banks and corporations (including S corporations, financial corporations and real estate mortgage investment conduits (REMICs)) that were subject to the franchise tax were required to pay at least the minimum franchise tax of $800. The only exceptions were qualified inactive gold and quicksilver mining corporations that were required to pay a minimum of $25 and credit unions with less than $25,000 in gross receipts that were not required to pay the minimum tax.

Bank and Corporation Tax: Apportionment* of State Net Income**

Item
1995
1996
Percent Change
Number Of Returns
Amount (Thousands)
Number Of Returns
Amount (Thousands)
Net Income (After State Adjustments)
38,788
$ 358,010,387
40,622
$ 430,410,771
20.2
Nonbusiness Income/Loss
Dividends
922
$ 9,055,614
1,050
$ 4,708,759
-48.0
Interest
4,461
3,141,728
5,250
2,413,740
-23.2
Property Rental Income/Loss
1,379
41,462
1,264
183,924
343.6
Royalties
276
416,343
480
267,687
-35.7
Gain/Loss from Sale of Assets
1,602
7,493,307
1,465
4,893,760
-34.7
Partnership Income/Loss
428
4,895,574
1,013
1,392,333
-71.6
Miscellaneous
1,054
2,314,651
850
989,534
-57.2
Total Nonbusiness Income/Loss
6,600
$ 27,358,679
6,701
$ 14,849,737
-45.7
Balance of Net Income
38,788
$ 330,651,708
40,622
$ 415,561,034
25.7
Plus Interest Offset
2,643
3,643,256
3,581
2,155,812
-40.8
Total Business Income
38,788
$ 334,294,964
40,622
$ 417,716,846
25.0
Apportioned Business Income/Loss Attributable to California
31,973
$ 36,611,559
34,585
$ 39,013,971
6.6
Nonbusiness Income/Loss Wholly Attributable to California
Dividends
296
$ 41,668
179
$ 59,499
42.8
Interest
870
187,451
1,918
116,587
-37.8
Property Rental Income/Loss
194
-51,475
435
-27,852
45.9
Royalties
73
1,863
16
804
-56.8
Gain/Loss from Sale of Assets
556
85,783
713
149,704
74.5
Partnership Income/Loss
341
4,159
912
84,147
1923.3
Miscellaneous Income/Loss
715
571,809
433
99,496
-82.6
Subtotal
32,192
$ 37,452,817
35,161
$ 39,496,356
5.5
Minus Interest Offset
701
95,226
1,116
60,364
-36.6
Balance of Net Income
32,192
$ 37,357,591
35,161
$ 39,435,992
5.6
Contribution Adjustment
2,570
4,608
3,229
32,207
598.9
Total State Net Income (After Apportionment)
32,192
$ 37,362,199
35,161
$ 39,468,199
5.6
Taxable Loss
10,730
$ -11,449,858
9,924
$ -12,347,887
-7.8
Taxable Profit
21,462
$ 48,812,057
25,237
$ 51,816,086
6.2

Credits

The total amount of tax credits used by California corporations for 1996 was nearly $935 million. Most credits are limited during the computation of alternative minimum tax (AMT). The section below provides information about credit limitations created by AMT.

Appendix C, Table 5 presents a complete enumeration of various tax credits applied for 1996. Note that information presented in Table 5 was developed from the return processing master file and will differ from information presented elsewhere in the report that was developed from sample data. Of interest is the growing impact of tax credits on corporate tax liabilities and, in particular, the impact of the Manufacturers’ Investment Credit (MIC) at $493 million. It should be noted that credits applied to reduce tax have roughly tripled since 1994, due primarily to the MIC. The next largest credit was the Research Credit at $278 million.

Alternative Minimum Tax

Beginning with the 1988 income year, the preference tax was replaced by an alternative minimum tax (AMT). Each bank or corporation (except S corporations) and exempt organization subject to tax on unrelated business income, whose taxable income plus adjustments and tax preference items total more than $40,000, may owe AMT. To determine if AMT is due, corporations must calculate their alternative minimum taxable income (AMTI) by recomputing certain deductions and income items and by increasing regular taxable income by specified tax preference items. The tentative minimum tax (TMT) rate of 7percent (banks and financial corporations must add the in-lieu tax of 2.0 percent to this amount) is applied to AMTI to determine TMT. If TMT is more than the regular tax, the corporation must pay AMT.

Most of California’s tax credits are limited by TMT. This credit limitation applies to corporations even if they do not owe AMT. Certain credits may reduce the regular tax below TMT. Also, a few credits may reduce AMT.

In 1996, 2,651 corporations paid more than $92.3million in AMT.

Total Tax Liability

For income years ending in 1996, the amount of total tax from bank and corporation taxpayers was nearly $4.9billion, which was an increase of 2.6 percent over 1995. The total number of bank and corporation returns filed was 430,796, a 3 percent increase over the previous year. Of the nearly $4.9 billion in total tax, the manufacturing sector accounted for over $1.6 billion in tax for income years ending in 1996. This, the largest portion of taxes paid, represents 33.1 percent of total corporate tax liability but represents only 45,415 corporate tax returns, or 10.5 percent of the total number of corporate tax returns filed. The finance, insurance and real estate sector accounted for $1.0 billion in tax, representing 20.6 percent of total corporate tax liability, and 69,941 corporate tax returns, representing 16.2 percent of corporate returns filed. The next highest amounts of tax were generated by the trade sector and the transportation, communication and utilities industries. The trade industry accounted for nearly $0.8 billion in tax, representing 15.9 percent of total tax liability, and 90,110 corporate tax returns, representing 20.9 percent of returns filed. The transportation, communication and utilities sector accounted for nearly $0.7 billion in tax, representing 13.9 percent of total tax and 13,011 returns, or 3.0 percent of the corporate tax returns filed.

Bank and Corporation Tax: 1996 Income Limits for Minimum Tax

Type of Corporation

Pays Minimum Tax If Net Income Is Less Than

S Corporations

Financial S Corporations

Banks and Financial Corporations

All Other Corporations

$53,366

22,871

7,084

8,607

Estimated Tax

Corporations are required to pay their tax on a current basis through estimated tax payments for the privilege of exercising their franchise to do business in California. Corporations pay the estimated tax in quarterly installments during the income year. For corporations subject to the franchise tax, the first quarterly installment must be at least the minimum franchise tax of $800.

Corporations paid nearly $4.7 billion in 1996 estimated tax payments compared to $4.6 billion in 1995 estimated tax payments, a 3.0 percent increase.

Refunds and Balances Due

For 1996, 123,164 corporations filed returns with balances due totaling nearly $280 million. This represents 5.7 percent of the total tax liability.

Approximately 84,129 corporations had overpayments for a total of nearly $2.2 billion, a 26.7 percent increase in the amount of overpayments from the prior year. These overpayments were either applied to the estimated tax for the following year, applied to another income year’s liability, or refunded.

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