Recent Changes To PTE Tax Are Good For Qualifying California Taxpayers

 

As you’re probably aware, the Trump era Tax Cuts + Jobs Act senate bill capped SALT (state and local tax) deductions.

Instead of being able to deduct the majority of the taxes you pay on income, capital gains, and property taxes paid at the state and local level, that deduction is now capped at $10,000.

As a workaround to this deduction cap, California passed AB 150 last summer. The bill allows eligible businesses to elect into a PTEIPass-through entity) tax between January 1, 2021, and January 1, 2026.

Electing for PTE taxes benefits “passthrough entity” business owners and business partnerships because these individuals pay personal income tax on a pro-rata share of their business profits. And this is considered business income rather than personal income, which is not subject to the $10,000 SALT cap.

While AB 150 offered an invaluable avenue to take full advantage of SALT deductions, it includes a number of limiting provisions that blunted the overall benefits of California’s PTE tax election.

To remedy SB 150’s shortcomings, Governor Newsom recently signed SB 113 into law. Changes enacted under the newly minted legislation are retroactive to the 2021 tax year.

Of course, the question is… “How does SB 113 change California’s PET tax election?” The new legislation implements several changes, but here’s a quick rundown of the key points…

Who Qualifies for PTE?

Any entity taxed as a partnership or S corporation with partners, shareholders, or members who are corporations, individuals, fiduciaries, estates, or trusts.

What Entities Are Excluded From PTE?

Publicly traded partnerships and any entity permitted or required to be in a combined reporting group.

A “combined reporting group” refers to a traditionally structured C corporation in which all incoming funds flow into corporate coffers. And all personnel, including company leaders, are employees paid by the corporation.

What’s Change Under SB113?

Entities that included a partnership as a partner were ineligible for PTE under SB 150.

To describe an example of this change in action, let’s say a group of physicians in partnership wanted to join with another group of physicians also in partnership to expand their service offerings. Such a partnership was excluded from PTE under SB 150 even though their individual partnerships were participating in an S corp.

SB 113 eliminates this restriction allowing entities that include multiple partnerships to elect for PTE taxes.

The PTE Election Deadline For 2021 Tax Filing

The deadline to elect for PTE taxes in filing your 2021 income tax return was March 15, 2022. So, unfortunately, you missed the boat for the 2021 fiscal year.

But the good news is that you have until the close of 2026 to elect into PTE taxes on future returns.

More Questions About SB 113 + PTE?

As is often the case with revisions to the tax code, this new legislation has a lot of folks scratching their heads.

If you think your business may qualify for PTE, I recommend getting in touch for a FREE consultation!