If you are a shareholder of an S Corporation, partner/member of a partnership/LLC, you might be able to get some of your state tax deduction back. As you may remember, the federal Tax Cuts and Jobs Act reduced the amount of the SALT deduction individuals can claim on their federal tax return to $10,000 starting with the 2018 tax year.
California recently passed Assembly Bill 150 (AB 150), which allows qualified entities to pay tax on the income from an S Corporation, or partnership (reported to you on a K-1). The tax paid would result in a credit that you may use to offset the tax due on your California individual income tax return.
You would also get a deduction (equal to the amount of tax paid by the entity on your behalf), reducing the federal income reported on your K-1. This is the intended purpose of the new law, to work around the reduced state tax limitation.
There are many unanswered questions to consider. The election is not due until March 15, 2022, but there is an opportunity to take the deduction on your 2021 return if a payment is made by December 31st. This new law is tricky, and there could be some downside to making the election.
Complicating this a little more, there is proposed legislation in Congress that could make this deduction more valuable in 2022.
Contact us if you would like our help addressing this new tax law before December 31st. California passed this law recently and had been very slow in providing guidance on how to implement its provisions, and they have yet to address many open questions.
About the Authors
So Sum Lee, CPA, Principal
Tax, Real Estate, Technology, Hospitality
So Sum Lee, CPA is a Tax Principal at KROST. So Sum has over 18 years of experience in public accounting and has a wide range of experience in Taxation, as well as servicing high-net-worth clients. So Sum’s area of expertise includes industries such as wholesale, Real Estate investments, and Restaurants. » Full Bio
David Troost, CPA, Senior Manager
Tax, Technology Industry
David Troost is a Tax Senior Manager at KROST. He has spent his career being a client advocate. As a trusted business partner to his clients, he has helped them meet their objectives by serving as a sounding board for decisions. David’s area of expertise includes federal and multi-state tax compliance and consulting for individuals, partnerships, and corporations. » Full Bio
Lou Guerrero, CPA, MBT, Principal
Tax, Tax Specialty Services, Financial Services Sector
Luis (Lou) A. Guerrero, CPA, MBT is Vice President of KROST CPAs and Consultants. As the Tax Practice department leader for KROST, Lou is responsible for the overall tax function of the firm and specializes in clients in the Financial Services sector (hedge funds, money managers, private equity), family office and high net worth individuals, Real Estate, Food Service (restaurants and related), Technology (including manufacturing and distribution) and professional service firms. » Full Bio