CA AB-150: Passthrough Entity Tax Election

California Assembly Bill No. 150 enacted on July 16, 2021 provided many amendments and changes to the state’s Revenue and Taxation Code. Among these changes under Part 10.4 Small Business Relief Act of the bill is a new elective pass-through entity (PTE) tax available to qualifying Partnerships and S-Corporations. This election is available for tax years 2021 through 2025.

How Does It Work?

This election allows any qualifying entity to pay the PTE tax, which is equal to 9.3% of its qualified net income. Because this is a state tax, it is a deductible expense for federal tax purposes. This deduction will pass through to the partners or shareholders on their K-1s according to their pro-rata or distributive share of income. For California residents, this amount will be treated as a non-refundable tax credit that may be carried forward for up to five years.

Why Does This Matter To Me?

Under the Tax Cuts and Jobs Act, the State and Local Tax (SALT) deduction is capped at $10,000 for individuals itemizing their deductions for federal purposes. For many taxpayers, this limitation has severely reduced the amount of itemized deductions they may take. California’s PTE tax acts as a workaround to this limitation for federal tax purposes because K-1 recipients are afforded a dollar-for-dollar reduction to their passthrough income from the electing entity, while simultaneously accumulating a California state tax credit.

What Should I Do?

If DKC prepares your Partnership or S-Corp’s tax return, we will be reviewing the applicability of this provision to your tax specific tax situation, but please reach out to your DKC representative to discuss any questions you may have. If DKC does not prepare your Partnership or S-Corp tax returns, we advise that you contact the appropriate representative of the entity or entities from which you receive a K-1 to discuss this election.