Now that the millennium bug has passed without leaving significant residual markings, Y2K also brings good news for small and newly formed corporations in California in the form of franchise tax relief. California established an annual minimum franchise tax to ensure that all corporation pay at least a minimum amount of franchise tax each year for the privilege of doing business in California, regardless of the corporation's level of income. However, with a growing budget surplus and a reputation for being unfriendly to business, the Legislature decided to assist small and newly formed corporations, with an eye towards greater prosperity in the future.

Traditionally, California imposed a minimum franchise tax of $800 on corporations either formed or qualified to transact business in California. Corporations had to prepay the tax to the Secretary of State upon incorporation or qualification. However, under Assembly Bill 10, which Governor Gray Davis signed into law on July 6, 1999, corporations, other than credit unions, formed or qualified to do business in California between January 1, 2000 and December 31, 2000 will not have to pay the $800 minimum franchise tax for their first two taxable years.

In addition, beginning January 1, 2001, all corporations, other than credit unions, regardless of when they incorporated or qualified to conduct business in California, will no longer have to prepay the minimum franchise tax. While corporations not formed in 2000 will still have to pay the minimum franchise tax, they will no longer be required to pay it at the beginning of the taxable year.

However, this type of tax relief is not new for the California Legislature. Just last year, the California Legislature reduced the minimum franchise tax for eligible new, small corporations beginning with the 1999 income tax to $300 for the first business year, and $500 for the second business year. To qualify as an eligible new, small corporation, the corporation must have been incorporated or qualified to do business in California on or after January 1, 1999, and have reasonably expected its gross receipts to be less than $1 million for its first income year.

Unfortunately, the franchise tax relief and the exemption from the minimum franchise tax is limited to corporations. The exemption does not apply to limited partnerships, limited liability corporations, limited liability partnerships, regulated investment companies, real estate investment trusts, real estate mortgage investment conduits, financial asset securitization investment trusts, or qualified Subchapter S subsidiaries.

It is important to keep in mind that this tax relief is only from California's minimum franchise tax. A California corporation, or a foreign corporation qualified to do business in California, still must file a California franchise tax return, and if it has sufficient income, it must still pay the California franchise tax under the normal calculations.