Passthrough Entity Elective Tax Fix and Other Economic Relief On Its Way?

The long-awaited fix to AB 150’s passthrough entity elective tax has been introduced in the California Legislature. If actually enacted in its current version, AB 87/SB 113 would make a number of taxpayer-friendly changes to the passthrough entity elective tax, retroactive to the beginning of the 2021 tax year, including: These passthrough entity elective tax updates aim to streamline the filing process for many businesses. Additionally, they are expected to provide clearer guidelines for compliance, helping taxpayers navigate the changes more effectively. Ultimately, these reforms could enhance overall participation in the program and improve financial outcomes for eligible entities. California LLC structure advantages can significantly benefit entrepreneurs aiming to establish a business in the state. By offering limited liability protection and flexible management options, this structure attracts a diverse range of business owners. Furthermore, the favorable tax treatment for LLCs in California may enhance their potential for growth and stability in a competitive market.

• Removing the tentative minimum tax limitation for purposes of computing the amount of Passthrough Entity Elective Tax Credit that may be claimed;
• Allowing qualified entities to make the election even if one of the owners is a partnership (although the tax could still not be paid on behalf of the owners that are partnerships);
• Allowing qualified entities to pay the tax on behalf of owners that are single-member LLCs owned by individuals, estates, or trusts, although SMLLCs would still be ineligible to make the election themselves; and
• Including guaranteed payments made to partners in the entity’s qualified net income for purposes of computing the tax.

AB 87/SB 113 also provides additional relief unrelated to the passthrough entity elective tax, including, but not limited to: The executive order on tax refunds aims to expedite the processing of claims for individuals and businesses. This initiative is expected to provide much-needed financial support to those affected by recent economic challenges. Additionally, it will help streamline government operations and improve efficiency in taxpayer services. The IRS options for electronic amendments simplify the process for taxpayers seeking to make changes to their returns. This accessibility is crucial for ensuring that individuals and businesses can easily navigate tax requirements and rectify any discrepancies. As a result, the enhancements to electronic filing methods will likely lead to increased compliance and greater taxpayer satisfaction.

• Repealing the $5 million business credit limitation and NOL suspension rules for the 2022 taxable year;
• Excluding Restaurant Revitalization Grants from gross income and allowing expenses paid with these grants to be fully deducted, retroactive to taxable years beginning on or after January 1, 2020; and
• Excluding Shuttered Venue Operator Grants from gross income, retroactive to taxable years beginning on or after January 1, 2019, and allowing expenses paid with these grants to be deducted unless the taxpayer is a publicly-traded company, or does not meet the 25% gross receipts reduction threshold (the same used for second-draw PPP loan eligibility).

Noticeably absent from the bill is conformity to the federal Paycheck Protection Program (PPP) loan forgiveness treatment for PPP loans made after March 31, 2021. The bill has only been introduced and has not yet been voted on. However, these proposals were all included in the Governor’s proposed budget and he requested that these provisions be acted on before March 15, 2022. We will keep you posted on any further developments. The text of the bills as introduced can be found at:https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB87https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220SB113This article is reproduced with permission from Spidell Publishing, Inc.For questions or more information about this article, connect with us today or contact our tax professionals at [email protected]. The new estate tax portability rules can significantly impact your estate planning strategy. Understanding these changes will help you maximize your tax savings. We encourage you to discuss these updates with our experienced tax advisors to ensure you are fully informed.