#AB150
Tax Savings Opportunity for Business Owners – Must Act Before March 15th
By: Michael Allbee, CFP®, Senior Portfolio Manager
We pointed out last year there was an opportunity for some Californian taxpayers to get relief for the $10,000 state and local tax (SALT) cap through 2021 – 2025. You can do this by paying some of your California taxes through a profitable pass-through business with some limits and nuances. This helps get around the $10k federal cap for state and local taxes.
There is still an opportunity to make the election for your 2021 return and make a payment to CA for 2021 by March 15, 2022, which will give you a higher deduction on your 2022 federal tax return and a credit against your 2021 CA taxes.
As of February 9th, California Governor Newsom signed a consequential new tax bill into law (SB 113) which expands eligibility for businesses who may benefit from the Pass-Through Entity Tax. Note, you can be a part owner of a business and still qualify.
For business owners of S-Corporation or LLC, you will want to discuss this with us and your tax advisor to make sure that it makes sense. The irrevocable election is made on an annual basis. If your business is a sole proprietor this would be a good time to review and see if it makes sense to convert to an LLC or S-Corporation this year.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
Relief for the $10k SALT Cap for Californians
By: Paul Horn, CFP®, CPWA®, Senior Financial Planner
We have seen recent legislation pass in California called Assembly Bill 150 (AB 150) that will provide a way for some business owners to be able to get around the $10,000 cap on the itemized deduction of state and local taxes (SALT) on federal tax returns. Until the Tax Cuts and Jobs Act (TCJA) passed in 2018, individuals were able to deduct all state and local taxes (SALT). Once the TCJA was passed there is now a cap of $10,000 per year and this cap hits many individuals living in California (CA) where home values and local taxes are large.
Understanding AB 150
The legislation passed for tax years 2021 – 2025, will allow business owners of qualified pass-through entities (S-Corporations and LLCs) to elect to pay a 9.3% tax on qualified net income at the entity level. The business owner is then eligible for a credit against their individual California income tax in an amount equal to their pro rata share of the elective tax paid by the entity (See IRS Notice 2020-75). As a result, you may indirectly increase your annual state tax deduction on your personal income tax return, in excess of the $10,000 SALT deduction limitation.
How To Take Advantage of AB 150
For business owners of S-Corporation or LLC, you will want to discuss this with us and your tax advisor to make sure that it makes sense. The irrevocable election is made on an annual basis. If your business is a sole proprietor this would be a good time to review and see if it makes sense to convert to an LLC or S-Corporation this year.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.