RINA Alert - August 30, 2021 | Volume 19, Issue 17
Last month, Governor Newsom signed Assembly Bill 150 which creates an elective tax that allows the taxes on pass-through income to be paid at the entity level. This means owners will be able to avoid the Federal $10,000 deduction limitation on State and Local Taxes (SALT) which they would have faced if they, and not the entity, paid taxes on the income.
We believe that many businesses of RINA's clients will qualify to adopt this strategy.
We believe many clients will achieve significant financial benefit from this new tax law.
How it will work
For taxable years beginning on or after January 1, 2021, and before January 2, 2026, the new legislation allows qualified entities to make an irrevocable election annually on an original, timely filed return to pay the tax on a qualified owner’s share of net income of the qualified entity.
Qualified entities include partnerships, limited liability companies with multiple members treated as a partnership, and S corporations.
The tax would then be deductible by the partnership or S Corporation. The partner or shareholder will be allocated a tax credit on their K-1 that they can apply towards their personal income tax. This effectively allows individuals, who are partners, members, and shareholders of small businesses to deduct SALT beyond the current federal cap.
Awaiting Further Guidance
RINA is currently waiting on further guidance from the Franchise Tax Board on implementation of the new law.
The procedure for how a qualified owner provides consent has not been addressed by the Franchise Tax Board. Until guidance is released, we recommend the qualified entity and qualified owner both sign a written consent.
RINA will provide further updates as they are available. Once the program becomes more defined, we will suggest that clients reach out to their RINA accountant to discuss how this may affect their business, state tax filings, or operations.
If you did not receive our emailed Alert on this topic and would like to receive notifications about SALT instructions in the future,
please visit our newsletter sign-up page
and select SALT (and other topics) from the list.