California recently joined several other states by enacting a legal workaround for the $10,000 limitation on state and local tax (SALT) deductions.1 This $10,000 limit was part of the Tax Cuts and Jobs Act of 2017 and had a major impact on taxpayers in states with high tax rates and incomes to match.2 But with this workaround, qualifying businesses can receive a tax credit above and beyond this limit, reducing their taxable income. Here is an overview of what this new law contains and how California’s businesses may benefit.
How Can AB 150 Help California Businesses?
On July 16 2021, Governor Gavin Newsom signed Assembly Bill 150 into law. This law applies for the tax years beginning Jan. 1 2021 and ending Jan. 1 2026. This is the date when many of the Tax Cuts and Jobs Act changes, including the $10,000 SALT cap, expire. AB 150 is intended to largely mitigate the impact of the Tax Cuts and Jobs Act on California businesses. 1
It allows all qualified pass-through entities, including LLCs, partnerships and S corporations that are required to file a California tax return to make an annual irrevocable election to pay a 9.3 % state tax on qualified net income. In return, the taxpayer will receive a credit against their California income taxes for the same amount. This credit may offer tax savings for those who pay more than a 9.3 % tax rate on qualified business income. 1
Who Qualifies for AB 150 Credit?
To qualify for the AB 150 deduction and credit, you will need to be a qualifying member of a qualified business that earns qualified net income. 1
· A qualified business under AB 150 includes an LLC, partnership, or S Corp that is not publicly traded. It does not have a partnership owner. It is not allowed or required to be in a combined reporting group and is not disregarded for federal tax purposes.
· Qualified net income is defined as the sum of the pro-rata shares or distributive shares of income of all relevant members, partners or shareholders of the pass-through business.
· Each member who receives qualified net income can qualify for the nonrefundable SALT workaround credit.
Because this area of the law continues to evolve, it is a good idea to raise the topic of AB 150 with your financial professional before you begin preparing your 2021 income taxes. The best way to apply AB 150 to your tax situation will depend on your financial circumstances, and your financial professional can work with you to find the most appropriate approach.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. 1 https://www.natlawreview.com/article/california-adds-to-list-states-allowing-state-and-local-tax-cap-workaround 2 https://taxfoundation.org/tax-basics/salt-deduction/
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