California AB 87 (SB 113) Retroactively Makes Taxpayer Friendly Changes to SALT Cap Workaround

February 8, 2022

Originally signed by the Governor on July 16, 2021, California Assembly Bill 150 established 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. 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.

When initially passed, there were various unexpected limitations and eligibility restrictions that prevented many taxpayers from benefiting from making the election.

On Monday February 7, 2022 California passed Assembly Bill 87 (SB 113), which retroactively makes a number of changes to the passthrough entity tax, including:

  • Removing the tentative minimum tax limitation, meaning that the Passthrough Entity Tax Credit can be utilized against all California income tax.
  • Expanding the eligibility of which entities can qualify to make the election to include Passthrough entities that have a partnership as a partner.
  • Clarifying that taxpayers who own an interest in a passthrough entity through a disregarded entity, can still benefit from making this election.
  • Include guaranteed payments made to partners in the entity’s qualified net income for purposes of computing the tax.

For more information regarding who can make this election and take advantage of this SALT Cap workaround read our full article that was posted prior to this rule change here.

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

Gatto, Pope & Walwick, LLP
Certified Public Accountants