May 16, 2022
We are bringing you an update on California's Assembly Bill 150 (AB 150), enacted in 2021 as a method for deducting state and local taxes in excess of federal deduction limitations.
AB 150 allowed pass-through entities (PTEs) to have the tax imposed and paid at the entity level rather than the individual level. This permitted PTE owners to bypass the deduction limitation. For those owners who elected to participate in this program, PTEs pay the tax on the qualified net income. Their owners receive a corresponding credit against the state income tax liability related to their PTE income. Any unused credit at the owner level could be carried forward for up to five years.
On February 9, 2022, Governor Newsom signed Senate Bill 113 (SB 113), which modified and expanded the pass-through entity elective tax benefits previously established under AB 150. The goal of SB 113 was to add clarity and conformity to the state's original objectives for establishing the PTE credit.
As discussed in prior e-blasts, making the PTE election for your business return can decrease your individual federal income tax.
The PTE election is made annually on an original return filed timely, including extensions. For tax years 2022 through 2025, the first PTE installment payment is due June 15 of each year and is equal to the greater of:
- 50% of the prior year's PTE elective tax paid, or
The second PTE elective tax installment is due by the entity's tax return due date (without extensions), which for most partnerships, LLCs, and S corps will be March 15, 2023.
If payment is not made by June 15, 2022, the election may not be made, and the pass-through entity and owners may not participate in the program for that corresponding tax year.
We understand that you may have many unanswered questions surrounding the PTE program. For example, since many 2021 returns will not be filed by June 15, taxpayers may not know what 50% of the 2021 tax will be. If a good faith estimate is paid on June 15 but ends up being short of the 50% when the 2021 return is filed, the 2022 PTE election is invalid.
To address this issue, Grimbleby Coleman recommends that taxpayers add a "cushion" to ensure taxes are not underpaid. If the PTE did not participate in the program for 2021, but the owners of the PTE are sure they will want to participate in 2022, we recommend that at least $1,000 be paid by this date for each participating entity.
Advising businesses and solving problems is what we do. Consult your accountant or contact a team member at firstname.lastname@example.org or call 209-527-4220 to discuss the specific facts and circumstances surrounding your PTE election.