On February 9, 2022, the California Governor signed Senate Bill 113 (SB113). SB113 addresses numerous tax provisions, including correction to issues related to Assembly Bill 150 (AB150).
AB150 allowed certain owners of qualified passthrough entities to work around the individual $10,000 federal limit on SALT deductions by paying a new elective state pass-through entity (PTE) tax. This resulted in a federal tax deduction (at the entity level) for state taxes paid on the electing owner’s share of allocable taxable income and a California credit against their California personal income tax liability.
However, AB150 had numerous issues and limitations. SB113 addresses most of these including:
- Repeal of the Tentative Minimum Tax limitation of the Passthrough Entity Elective Tax Credit. This was the most serious limitation to the benefits intended by the new SALT limitation work around and is a significant win for taxpayers in California.
- Allows passthrough entities that have a partnership as a partner to make the PTE Election, eliminating another significant limitation in the original law.
- Allows a single member LLC to be included (as a “qualified taxpayer”) in the calculation of the PTE. Note that an SMLLC is still not allowed to make the PTE election at its entity level.
- The new law changes the credit ordering rules related to the PTE credit relative to the credit for taxes paid to other states. This was meant to remove the negative impact on taxpayers that claim the Other State Tax Credit.
Other significant changes resulting from the passage of SB113 that may affect you include:
- California’s suspension of NOL’s and the $5 million business credit limitation (for high-income taxpayers) are both repealed for 2022.
- Retroactive to the 2020 tax year, California conforms to the federal exclusion of the Restaurant Revitalization Grant.
- California now conforms to the federal treatment of the Shuttered Venue Operator Grants retroactive to 2019.
These are the most notable changes from SB113. We will advise you as we get more guidance from California. Please contact us if you would like help addressing the benefits of the SALT limitation workaround or any of the other changes above.
Please contact us if you have any questions regarding the implementation of the State Tax Deduction Workaround.
About the Authors
David Troost, CPA, Director
Tax, Technology Industry
David Troost is a Tax Director 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
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