SALT – State And Local Taxes
The 2017 tax reform act, Tax Cuts & Jobs Act (TCJA), limited State and Local Taxes (SALT) to $10,000 per year for individuals. One cute thing about this is that tax deductions for business entities were not limited by the act. So, as you might imagine, in Notice 2010-75, the IRS blessed the notion that if a state permitted a pass-thru business entity to pay the income tax on behalf of an owner/shareholder, the business could take the deduction for the tax thereby reducing the income (for federal income tax purposes) of the owner that is generated by the business.
As part of the current budget legislation, AB 150, California enacted legislation effective for tax years beginning January 1, 2021 that allows businesses to make a payment of income taxes and gives the owner a credit against their California income tax for the payment made by the business.
Of course, there is a catch and there are details to be dealt with. The credit is not refundable – so if the business pays more than the tax, you don’t get a cash refund. However, any credit not used in the current year can be carried over for 5 years into the future.
Another little detail is that beginning in 2022, if the business wishes to do this for the shareholder once again, the business must pay an advance credit payment of 50% of the prior year’s credit by June 15, 2022. Now, why on earth would California do that? Well, the state’s fiscal year ends on June 30, and the state needs to “balance” its budget each year – So how much better it is for the budget to get a huge infusion of cash deposits just before the end of the year?
The great thing for owners of pass-thru entities is that they can now deduct a much larger portion of their state income tax liability than previously available using this technique. Stay tuned for another installment of tax information.