California Assembly Bill 150 (AB 150) allows a pathway for pass-through entity owners to work around the $10,000 cap on state and local tax (SALT) deductions imposed by the 2017 Tax Cuts and Jobs Act.
AB 150’s workaround, effective for tax years starting on or after January 1, 2021, is an election available to qualifying pass-through entities (PTEs) including partnerships and S corporations whose owners are individuals, estates, trusts or corporations. Entities with partnership owners are not permitted to make this election.
Essentially, the eligible PTE can elect to pay a 9.3% tax on the entity’s qualified net income, which equals the total of the consenting owner’s distributive share of California taxable income. The California tax is claimed as a deduction for federal tax purposes, thereby reducing the federal taxable income reported on Form K-1 of the consenting owners. Each owner will receive a credit for the tax paid on their California tax return.
The implementation of the new law has not yet been clearly defined and there are many questions the Franchise Tax Board (FTB) needs to provide guidance on. We will keep you informed as additional guidance comes out.
Note: The California elective pass-through entity tax will be repealed if federal legislation is enacted that repeals the SALT deduction limitation.
For more information on this and other tax matters, please contact your LLME tax advisor at (858) 455-1200 or by email.