Governor Newsom recently signed Assembly Bill 150, which creates a pass-through entity tax election for companies doing business in California. The entity tax is a workaround to the $10,000 state and local income tax deduction reported on Schedule A attached to Form 1040.
- The pass-through entity pays a 9.3% tax on the net income of each shareholder, partner, or member that consented to have its share of income included in the entity’s income, and
- Each consenting shareholder, partner, or member reports a credit against state income tax on their California income tax return.
An example of how this election works and the potential tax reduction the election can provide is shown below.
- the pass-through entity tax election becomes inoperable if the U.S. Congress repeals the $10,000 limitation,
- many California taxpayers may be subject to the alternative minimum tax if Congress repeals the $10,000 limitation, and the repeal causes California to revoke the election
- the election applies for tax years 2021 through 2025 only,
- the credits reported on the California return expire after five years,
- tiered partnerships cannot make the election,
- the election does not apply to sole proprietorships and disregarding entities, such as single-member limited liability companies, and
- the Franchise Tax Board guidance is greatly needed.
We recommend proceeding cautiously until the Franchise Tax Board issues guidance and regulations. Making the election may not benefit all owners equally; therefore, we recommend analyzing, modeling, and planning for this tax before making the election.
Disclaimer: Tax laws are complicated, and your taxes are unique to you. A law favorable to you may not benefit the next person because the facts and circumstances are different. Therefore, we are notifying you that our emails are not comprehensive and do not provide specific tax advice to you for which you can use for tax planning purposes. We highly recommend contacting us before taking any action concerning the content of this email.