AB150 Creates Elective Pass-Through Entity Tax

On July 16, 2021, Governor Gavin Newsom signed into law California Assembly Bill 150, creating an elective pass-through entity (“PTE”) tax. The bill is intended to provide tax relief to California small business owners facing unprecedented economic hurdles due to COVID-19.

AB150 provides these taxpayers with a workaround to the $10,000 limitation on SALT itemized deductions imposed under the Tax Cuts and Jobs Act of 2017 (TCJA).  The bill provides owners of qualified pass-through entities with an elective withholding tax that reduces Federal income passed through to the owners and provides a California tax credit equal to the withholding to avoid double taxation on the income.  Entities eligible for the PTE elective tax include the following:

• S Corporations,
• General Partnerships,
• Limited Liability Companies taxed as Partnerships,
• Limited Liability Partnerships, and
• Limited Partnerships

The withholding rate is 9.3%. The credits are available to electing taxpayers from January 1, 2021, through December 31, 2025.

There are limitations on the passthrough entities eligible to take part in the withholding, and the bill limits the number of entities eligible to take advantage of the withholding credits. Additionally, there are limitations on the annual credits allowed to offset California regular taxes. Unused credits can be carried forward for up to five years.

Please contact us if you have questions or to discuss how this bill may benefit you.