California Governor Signs into Law Taxpayer-Friendly Measures Related to California’s Pass-Through Entity Tax (PTE), Net Operating Loss Limitations and Other Provisions
Following the recent proposed budget by Governor Gavin Newsom, the California legislature acted quickly and presented Senate Bills 113 (S.B. 113) and 114 (S.B. 114) for the Governor’s signature and he signed the bill on February 9, 2022. S.B. 113 addresses a number of tax provisions, most notably the following:
Pass-Through Entity Tax (PTE) changes applicable to tax year 2021
- The new law repeals the one of the most serious limitations of the originally PTE law – it removes the tentative minimum tax limitation on the Passthrough Entity Elective Tax Credit.
- The new law allows pass through entities (partnerships / S Corps, LLCs) that have a partnership as one of its partners, to make the PTE election. Under the original PTE rules, a pass-through entity with a partnership as a partner was ineligible to make the election.
- The new law allows single member LLCs (SMLLCs) to be included (be a “qualified taxpayer”) in the calculation of the PTE along with other qualifying partners / members. Note that an SMLLC is still not allowed to make the PTE election at the entity level.
- (Beginning in 2022) – the new law changes the credit ordering rules related to the PTE credit (taken after the credit for taxes paid to other states), which is meant to increase the benefit for taxpayers that claim the Other State Tax Credit.(OSTC). This has been further clarified to confirm the intent of the legislature to allow taxpayer’s claiming both the OSTC and PTE to get maximum benefit of both credits.
- Note that the updated legislation did NOT remove the requirement that electing taxpayers make a June 15th pre-payment to insure qualification for the election.
Additional Provisions in S.B. 113
- The new law fully conforms California law to the federal exclusion of Restaurant Revitalization Grants, retroactive to the 2020 tax year;
- The new law partially conforms California law to the federal exclusion of Shuttered Venue Operator Grants, retroactive to the beginning of the 2019 tax year; and
- The new law repeals the $5 million business credit limitation and NOL suspension for higher income taxpayers for the 2022 taxable year.
S.B. 114 – Supplemental Paid Leave for Employees
- Under S.B. 114, employers with more than 25 employees are required to provide up to 80 hours of COVID-19–related paid supplemental sick and family leave, retroactive to January 1, 2022, through September 30, 2022.
- Under S.B. 114, there are no provisions that provide tax benefits or credits to employers who provide the supplemental paid leave.
Please contact our Specialty Tax Group for additional guidance on how your company or your client’s company may benefit from this unique opportunity.