We wanted to provide you with an update regarding tax legislation recently passed that may affect you.
If you are a shareholder, partner, or member of an S corporation, partnership, or LLC, you may be able to reduce your federal income tax liability.
The Tax Cuts and Jobs Act reduced the amount of the state tax deduction individuals may claim on their federal tax return to a maximum of $10,000. This limitation caused significant tax increases to taxpayers living in high property and high state income tax states (such as California).
To assist business owners who are recovering from the global pandemic, California recently passed Assembly Bill 150 (AB 150). This bill allows qualified S corporations, partnerships, or LLCs to pay tax on their individual, trust, or estate owners’ share of the entity’s qualified net income at the entity level. Furthermore, the bill also allows these owners to claim a credit for the tax paid on their California personal income tax return. The effect of this is the following:
1. Owners may reduce their federal taxable income by the amount of CA state tax paid by the entity. This provides much needed relief to California taxpayers because the taxes paid on their share of the passthrough income will not be counted toward your $10,000 state and local tax deduction limit.
2. Owners may claim a California tax credit equal to the amount of the entity tax paid on their share of the entity’s income.
This new tax treatment is commonly referred to as the state and local tax (SALT) workaround.
There are many factors to consider in evaluating whether it makes sense for a passthrough entity to make the election to pay the tax, and whether you should consent to have the entity pay tax on your share of the entity’s income.
If you choose to make this election, the tax payment must be made no later than March 15, 2022. For cash basis taxpayers, in order to claim the state tax deduction on your 2021 federal tax return, the state tax payment must be made before December 31, 2021. We are currently awaiting guidance from the IRS to see if they will grant a delay in making the state tax payment.
Have a question? Contact David Ellis, CPA, California.
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