Update: On February 9, 2022, Governor Newsom signed Assembly Bill 87, part of which addresses changes to the elective pass-through entity (PTE) tax credit rules under Assembly Bill 150 (SALT workaround). As originally written, Assembly Bill 150 was intended to help California pass-through entity owners with the federal limit on state tax deductions on their personal returns. However, it needed corrections to fix oversights and technical issues so that pass-through owner taxpayers could take full advantage of this benefit.
Effective for tax years beginning on or after January 1, 2021, the revised law now allows:
- The new credit to offset Tentative Minimum Tax (TMT).
- Single-member LLCs (SMLLCs) can be included in the calculation of the credit if their owner is a qualifying member.
- Allows a PTE with a partnership as a partner to make the PTE election, even though the partnership owner itself cannot be part of the credit calculation.
Starting in 2022, there is also an increased benefit for taxpayers that claim the Other State Tax Credit (OSTC) by changing the ordering rules to allow for the OSTC to be taken before the new PTE tax credit.
There are still some cases where the new SALT workaround will not be beneficial. Please work with your Aldrich Advisor to confirm what is best for you. Applicable tax payments will need to be made by March 15.
California Governor Gavin Newsom signed Assembly Bill 150 on July 16, 2021, incorporating a state and local tax (SALT) workaround through an elective 9.3% tax for pass-through entities. The measure bypasses the $10,000 per year SALT cap on itemized deductions.
California’s A.B. 150 is effective for taxable years 2021 through 2025, which correlates with the SALT deduction cap. Qualified pass-through companies include S-corporations, limited liability companies, and partnerships. The new bill will allow certain owners (individuals, fiduciaries, trusts, estates, or certain entities taxable as corporations) of qualified flow-through entities to receive an elective state tax credit for their corresponding share of pass-through entity-level state taxes paid by partnerships and S corporations.
This annual elective 9.3% pass-through entity tax (PTE) can be made on an owner-by-owner basis. The due dates and information for this elective pass-through tax are as follows:
- If the tax year begins on or after January 1, 2021 and before January 1, 2022, the pass-through tax must be paid on the original tax return due date.
- If the tax year begins on or after January 1, 2022 and before January 1, 2026, the qualifying electing entity is due to be paid in two portions:
- The first is due on or before June 15 of the annual elective taxable year. The amount will be either 50% of the elective tax paid the taxable year before or $1,000, whichever is greater.
- The second is due on or before the original tax return due date for the qualified entity, typically March 15.
We anticipate additional guidance to be forthcoming from the Franchise Tax Board and will continue to keep you updated.
Managing Your Tax Liability with Aldrich
With California tax laws being continually updated and changed, business owners should consult with their Aldrich Advisor to better understand their tax liability. Each bill adds another layer to consider when evaluating your tax planning strategy and savings potential. Our experts will continue to monitor for additional developments and keep you apprised of further updates and changes.
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Andrew Davidson, CPA
Aldrich CPAs + Advisors LLP
Andrew serves his clients by providing strategic, forward-looking, holistic tax strategy, structure, planning and compliance. He is a trusted advisor for closely-held business and individual clients. Andrew has in-depth experience serving clients in a range of industries including manufacturing, retail, wholesale, distribution, agribusiness, real estate, and professional services. Andrew describes himself as a “blue-collar CPA... Read more Andrew Davidson, CPA
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