Detailed California Development
The “Small Business Relief Act” included in California Assembly Bill 150 allows “qualified entities” doing business in California to elect to pay an entity-level tax equal to 9.3 percent of qualified net income. A “qualified entity” means an entity that is taxed as a partnership or an S Corporation and whose partners, shareholders or members are exclusively corporations or taxpayers as defined under the personal income tax law, excluding partnerships. Publicly traded partnerships and entities required or permitted to be in a combined reporting group are not considered “qualified entities.” The “qualified net income” of a qualified entity means the sum of the pro rata share or distributive share of income subject to tax under California’s personal income tax law for the taxable year of each qualified taxpayer. A “qualified taxpayer” means a taxpayer, excluding partnerships, that is a partner, shareholder, or member of an electing qualified entity that consented to have their pro rata share or distributive share of income subject to California tax included in the qualified net income of the electing qualified entity. A “qualified taxpayer” does not include a business entity that is disregarded for federal tax purposes, or its partners or members. The tax is based on the sum of the pro rata share or distributive share of income attributable to electing partners, shareholders or members. A partner, shareholder, or member that does not consent does not prevent the qualified entity from making an election to pay the elective tax. A qualified taxpayer (i.e., the owner of the pass-through entity) is entitled to a credit against its personal income tax for 9.3 percent of the taxpayer’s distributive or pro rata share of qualified net income subject to the election. If the credit exceeds the net tax due, the remaining amount may be carried over for five years.
If the $10,000 federal SALT cap is not repealed in the intervening years, the election is effective for taxable years beginning on or after January 1, 2021 and before January 1, 2026. For taxable years beginning on or after January 1, 2021, and before January 1, 2022, the elective tax is due and payable on or before the due date of the original return that the qualified entity is required to file (without regard to any extension of time for filing the return) for the taxable year of the election. In other words, for calendar year pass-through entity taxpayers, the elective tax would be due and payable by March 15, 2022. For the 2022 tax year and beyond, the first installment payment is due on or before June 15th of the election year. If that first payment is not made by June 15th, the election cannot be made for that year. Once made on an original, timely-filed return, the election is irrevocable. The FTB is authorized to adopt regulations to implement the elective tax, but Assembly Bill 150 specifically states that California’s Administrative Procedure Act does not apply to any regulations (or other guidance) promulgated by the FTB with respect to the elective tax. Please contact Gina Rodriquez with questions.
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