Key Takeaways:
- San Francisco voters approved Proposition M, significantly altering the city’s business taxes.
- Amends the gross receipts tax by modifying the apportionment formula, raising the tax rate range and increasing the exemption threshold.
- Reduces the exemption threshold for businesses subject to the homelessness gross receipts tax.
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On November 5, 2024, the voters of San Francisco passed Proposition M with 70% support. This law, which significantly alters the city’s business taxes, went into effect on January 1, 2025.
Proposition M changes San Francisco’s annual business tax, which includes:
- Gross Receipts Tax
- Homelessness Gross Receipts Tax
- Overpaid Executive Gross Receipts Tax
- Administrative Office Tax
- Business Registration Fee
While there is a projected decrease in revenues of approximately $40 million for the first three years, it is anticipated that revenue from the tax changes will generate positive revenues of approximately $50 million beginning in 2027.
Gross Receipts Tax
The Gross Receipts Tax rate depends on your business type, with the rate increasing as your business generates more gross receipts. The new law makes the following changes:
- Reduces the number of business type categories from 14 to seven.
- Changes the apportionment formula, allowing most industries to use a 75% market-based sales allocation and 25% payroll apportionment (previously it was 100% of payroll or 50/50 sales and payroll factors).
- Increases the tax rate range to 0.1%–3.716% (up from 0.053%–1.008%).
- Exempts most businesses with gross receipts of up to $5 million (the previous exemption threshold was up to $2.19 million).
Homelessness Gross Receipts Tax
The Homelessness Gross Receipts Tax is an added tax on businesses with San Francisco gross receipts over a prescribed amount. Previously this amount was $50 million; the new law lowers the threshold to $25 million. The applicable rates changed from 0.175%–0.69% to 0.162%–1.64%.
Other Tax Changes
The Overpaid Executive Gross Receipts Tax is an added tax on businesses that pay their highest-paid managerial employee much higher than the median compensation they pay their San Francisco employees. The calculation of the tax is modified, and rates changed from 0.1%–0.6% to 0.02%–0.129%.
The Administrative Office Tax is a tax on payroll expenses paid by certain large businesses instead of the other business taxes. The tax rates are lowered to 2.97%–3.694% (previous rates were 3.04%–5.44%) and the associated business registration fee range decreased from $19,682–$45,928 to $500–$35,000.
The Business Registration Fee is considered an additional tax based on business type and gross receipts. This fee increased based on inflation. The fee was previously between $47–$45,150 for most businesses and will now be $55–$60,000.
Example Calculation:
Scenario 1
Taxpayer is a Category 5 filer and has the following factors:
- Total gross receipts: $5,000,000
- San Francisco gross receipts: $100,000
- Total payroll: $1,000,000
- San Francisco payroll: $450,000
In 2024, the taxpayer would have a tax liability of approximately $15,000. With the new tax amendments in effect, the change in apportionment will result in a projected zero tax liability in 2025.
Example Calculation:
Scenario 2
Taxpayer is a Category 5 filer and has the following factors:
- Total gross receipts: $75,000,000
- San Francisco gross receipts: $50,000,000
- Total payroll: $1,000,000
- San Francisco payroll: $10,000
In 2024, the taxpayer would have a zero tax liability. With the new tax amendments in effect, the change in apportionment will result in a projected tax liability of approximately $512,000 in 2025.
How MGO Can Help
Proposition M’s enactment is a substantial transformation of San Francisco’s business taxes. While these changes may simplify tax compliance and reduce the tax burden on small businesses, the impact on individual taxpayers may be significant.
We can help you:
- Decide if your business’ tax classification has changed
- Analyze adjustments to your company’s tax obligation
- Prepare and file the required returns accurately and on time
Reach out to our dedicated State and Local Tax team today to find out how we can help your business.