AB150 CREATES WORKAROUND FOR CURRENT $10,000 LIMITATION ON DEDUCTION FOR STATE AND LOCAL TAXES PAID
Governor Newsom signed California Assembly Bill 150 (AB150) into law on July 16, 2021, which created a workaround for the current $10,000 limitation on the deduction for state and local taxes paid for individuals established by the Tax Cuts and Jobs Act (TCJA). AB150 creates an elective tax that allows the taxes on pass-through income to be paid at the entity level. This new law allows certain pass-through entities to annually elect to pay an elective tax in the amount of 9.3% of the pro-rata share or distributive share of the entity’s partners, shareholders, or members. The partners, shareholders, and members then receive a tax credit equal to that amount. The law is effective for taxable years beginning on or after January 1, 2021, and before January 1, 2026.
The pass-through entities that can elect to pay this tax are S corporations, general partnerships, limited liability companies taxed as partnerships, limited liability partnerships, or limited partnerships. To qualify to make this election, the pass-through entity’s owners must consist solely of individuals, fiduciaries, trusts, estates, or entities taxable as corporations. The pass-through entity cannot have a partnership as an owner, cannot be a publicly traded partnership, and the pass-through entity cannot be permitted or required to be in a combined reporting group.
The pass-through entity will pay tax at a rate of 9.3% on the total of each consenting owner’s pro-rata or distributive share of income subject to California personal income tax (beginning at RTC section 17001). The election to pay the tax must be made on the entity’s original, timely-filed return and is irrevocable for the taxable year.
Partners, members, and shareholders who consented to the pass-through entity making the election are allowed a credit equal to 9.3% of tax paid on their pro-rata or distributive share of the entity’s income. If the credit exceeds the tax due, any unused credit may be carried forward for 5 years or until exhausted. A partner, shareholder, or member that does not consent does not disqualify the entity from making the election to pay the tax, however all partners, shareholders, and members of the entity are bound by the entity’s election.
For taxable years beginning on or after January 1, 2021, and before January 1, 2022, the tax must be paid on or before the due date of the original return of the electing pass-through entity, without regard to any extension of time for filing a return for the taxable year of election. For calendar year filers, the 2021 due date is March 15, 2022.
For each taxable year beginning on or after January 1, 2022, and before January 1, 2026 the pass-through entity must pay on or before June 15th of the taxable year of the election, the greater of:
- 50% of the elective tax paid the previous year or
On or before the original due date of the tax return, the pass-through entity is required to pay the elective tax due to less the amount paid on or before June 15th of the taxable year of the election. For the election to be valid, the pass-through entity must make timely payment.
Will Making an Election under AB150 Benefit You?
Determining whether or not to make this election can be complicated — based on where your entity is doing business and the location of the owners. Moskowitz LLP can assist with questions on how the calculation works and whether or not this election could be beneficial for you.
Please schedule an appointment with us to discuss how this State and Local Tax limitation workaround may work for you.