California’s AB 150, which was signed into law on July 16, 2021, may provide an opportunity for owners of pass-through entities to negate the $10,000 limit on the SALT deduction.
The new state law allows pass-through entities such as S Corporations and partnerships to elect an entity-level tax (PTE-tax). Tax paid at the electing entity level would be 9.3% of the owner’s proportional share of income. The PTE-tax credit is non-refundable and unused credit will carry forward for five years. The PTE-tax election provides an opportunity to deduct the tax payments as a business expense. This tax strategy could benefit taxpayers limited by the $10,000 cap on deducting state and local tax payments, which Congress enacted in 2017.
Congress is debating whether to increase the SALT cap, which may reduce the effectiveness of AB 150. Additionally, the alternative minimum tax may limit an individual’s ability to benefit from the new law. Careful consideration should be given before making the election. Accordingly, we advise that you discuss your specific facts and circumstances with your tax advisor. Read the law.