When Governor Gavin 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.
In general, individuals who deduct State and Local income, sales, and property taxes are limited to a combined total deduction of $10,000. With this new law, California now offers a “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 lowering the Federal income and a California credit is passed through to offset the California income tax at the personal level. 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.
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.