United States:
California is pending “workaround” on limiting state tax deduction for certain transit company owners
July 22, 2021
Sheppard Mullin Richter & Hampton
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On July 16, 2021, Governor Newsom signed the California Assembly Bill 150, which allows certain pass-through business owners to bypass the current $ 10,000 limit on state and local tax deductions (SALT) for individuals. The new law, which applies to tax years beginning on or after January 1, 2021 and ending before January 1, 2026, allows many partnerships, limited liability companies that are taxed as partnerships, and S companies to be Based on an individual’s choice to pay a corporate income portion of the owners’ income and then credit the owners with California income tax for the full amount of tax paid at the corporate level on their distributing portion of California taxable income.
Choice and Payment of Entity
A pass-through unit is entitled to vote if:
- Their owners consist exclusively of natural persons, trustees, trusts, estates or corporations that are taxable as corporations;
- It is not a publicly traded partnership; and
- It is not permitted or required to be included on a California combined report.
Eligible corporations voting in the election will pay a 9.3% tax on the total of each approving owner’s proportionate portion of the corporation’s California taxable income – for California residents, their total distributing portion and the distributing portion of California source income for foreigners. Individual owners can choose whether or not to consent to their income being included when a company makes that choice, and consent from all owners is not required for the company to make the choice.
The election is irrevocable and must take place annually with a timely declaration for the election year. For tax years beginning 2021, regardless of any renewals, tax is due on or before the due date of the company’s return. For tax years beginning between 2022 and 2025, election tax is due in two installments: the higher of $ 1,000 or 50% of the tax paid in the previous year is due by June 15 of the taxable year of the election, and the remainder on or is due before the due date of the original return (excluding any renewals).
Owner loan
Consenting business owners who choose will be able to claim 9.3% of the tax paid by the entity on their California tax return on their California tax return on the owner’s share of California taxable income. Excess credits can be carried forward for up to five years. Consenting non-resident or partial resident owners may be restricted from obtaining other California loans, including tenant loans and tax credits paid to other states.
If the owner cannot use the credit in the first year, he can carry forward the credit for 5 years. California taxpayers who are non-residents and resident for only part of the year are eligible for this credit in full. However, owners who are not considered for tax purposes, as well as their members or shareholders, are expressly excluded from claiming this credit.
This choice and the associated crediting for taxpayers can be made for tax years beginning on or after January 1, 2021 and before January 1, 2026; However, companies should be aware that if the state cap on SALT deductions is lifted, their ability to claim this option will be lost, as the law will automatically override that. We encourage all taxpayers interested in this choice to contact their accountant or attorney to find out if this choice is right for them.
The regulations expire on December 1, 2026 and will automatically be lifted earlier if the federal restriction on state tax deductions is lifted.
The content of this article is intended to provide general guidance on the subject. You should seek expert advice regarding your specific circumstances.
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