Pro-Taxpayer Changes Made to California Workaround to Federal Limitation on Tax Deductions

February 9, 2022

Governor Newsom just signed into law Senate Bill 113 (“SB 113”), which includes several taxpayer-friendly changes to the California elective passthrough entity tax (PTET).

As a reminder, the PTET is designed to allow owners of qualifying passthrough entities (entities taxed as a partnership or an S corporation) to deduct state taxes on their share of such entities’ qualified net income as an entity-level expense rather than an itemized deduction subject to a $10,000 cap. For a review of how this workaround to the federal limitation on state and local tax deductions works, and criteria for eligibility, please refer to the alert we previously sent when this was first enacted:

SB 113 greatly expands the availability of the PTET to more passthrough entities and their owners, specifically:

  • Passthrough entities that have owners that are partnerships or LLCs taxed as partnerships now qualify to make the election. For tax year 2021, the PTET payment is due by March 15, 2022.
  • More owners of electing passthrough entities, including those who own their interest through a single-member LLC or receive guaranteed payments, can benefit or get a greater tax benefit.
  • Owners of electing passthrough entities will be able to utilize more of the PTET credit on their 2021 tax returns due to the removal of the tentative minimum tax limitation that previously greatly limited or eliminated the immediate benefits of the PTET.

With the March 15th deadline for making the PTET payments for 2021 quickly approaching, we recommend addressing these issues immediately. If you would like us to calculate the impact of these changes to you, please let us know. We have been closely monitoring the California PTET and are prepared to help you navigate the changes.