California, as well as several other states, have instituted a law that allows business owners to take advantage of State tax deductions that you wouldn’t be able otherwise. If you own an entity, S-Corp, or Partnership, you can pay your personal state tax at the entity level, deduct it on your federal entity return, thus lowering your taxable income at the individual level and saving federal tax on your state tax payments, which normally would be limited on the personal return.
For example, if you have a $200,000 profit on your entity, and the state tax payments are roughly $20,000, that would save you about $5,000 in federal tax, just by paying that state tax at the entity level, rather than paying it at the entity level.
SALT Money Saving Strategy – Summary
When Governor Newsom signed A.B. 150 into law on July 16, 2021, he created an opportunity for business owners across California to obtain a larger State tax deduction on their Federal Tax Return for the 2022 tax year.
Now, California now offers a “workaround” (called the SALT Workaround) of the $10,000 Federal cap on individuals’ deductions for State and Local taxes for qualifying S corporations, partnerships, and limited liability companies.
The way this works is that the California tax is paid by the business, thus lowering the Federal income and a California credit is “passed through” an entity to offset the California income tax at the personal level.
Salt Work-Around Precautions
There are some potential pitfalls to this. For example, it is a non-refundable credit that is passed through to offset the state tax and any unused amount carries forward for the 5 years this is in place. This tax law is applicable through 2025.
Additionally, the SALT workaround is not available to publicly traded partnerships or an entity that is part of a California combined reporting group.
PTE Elective Tax Calculation
The elective tax is 9.3% of the entity’s qualified net income, which is the sum of the pro rata or distributive share and guaranteed payments of each qualified taxpayers’ income subject to California personal income tax.
The first installment for 2022 must be paid on or before June 15th 2022. If the June payment is not made timely you will not be allowed to make the election for 2022. The second installment will be paid in December to take full advantage of the tax deduction in 2022.
The initial payment for firms that participated in 2021 must be $1,000 or 50% of the Pass-Through Entity tax for 2021. The initial payment for firms that did not participate in SALT for 2021 is $1,000 or more.
Schedule a Consultation
We highly recommend that you speak to a tax professional to determine if this is something that will benefit you. Schedule a consultation with one of our experts to help determine if you qualify for this tax saving strategy.