California AB 150 Provides SALT Cap Workaround

On Friday July 16, 2021 California Governor Gavin Newsom signed Assembly Bill 150. This bill contains a mixture of tax relief measures, which includes a SALT Cap workaround.

Prior to the 2018 tax year an individual taxpayer could deduct certain state and local taxes (including state income taxes) without limitation for federal purposes. In late 2017 congress passed the Tax Cuts and Jobs Act (TCJA) which imposed a $10,000 limitation for state and local taxes, severely limiting what was most taxpayer’s largest itemized deduction. This limitation hit taxpayers living in high tax states like California especially hard.

California has now joined the growing list of states, since the passage of TCJA, which have implemented a workaround using passthrough entities in order to minimize the impact of the limitation for their residents and taxpayers.

For taxable years 2021 through 2025, California Assembly Bill 150 establishes the Small Business Relief Act which allows qualified passthrough entities that are required to file a California tax return, to elect to pay and deduct a passthrough entity tax of 9.3% on qualified net income. This elective level tax is deductible by the entity for federal purposes, thereby effectively bypassing the federal SALT limitation that applies to individuals on the tax attributable to the passthrough entity’s income.

If you are an owner in a qualified passthrough entity (S-corporation or Partnership) and incur a personal state tax liability in excess of $10,000 each year, then this bill may allow you to indirectly increase your annual state tax deduction on your personal income tax return, in excess of the $10,000 individual limitation, and as a result, reduce your overall Federal income beginning with the 2021 tax year.
The consenting passthrough entity owners can also claim a nonrefundable credit for the amount of tax paid on the owner’s distributive share of the entity’s net income.

For more information regarding who can make this election and take advantage of this SALT Cap workaround read our full article here.

Please do not hesitate to contact our office if you have any questions.

Gatto, Pope & Walwick, LLP
Certified Public Accountants