The Tax Cuts and Jobs Act (TCJA) of 2017 placed a $10,000 limit on the amount of state taxes and property taxes individuals could deduct. In response, many states, including California, enacted pass-through entity (PTE) tax laws as a workaround allowing certain entities to be taxed at the entity level for state taxes.
California Governor Gavin Newsom signed Assembly Bill 150 (AB 150) in July of 2021. According to the State of California Franchise Tax Board, AB 150 allows S Chapter corporations, LLC’s, and partnerships (collectively, “pass-through entities”) to elect to pay an entity level tax of 9.3% of their taxable California income for tax years on or after January 1, 2021 and before January 1, 2026.
The irrevocable annual election is made using Form 3804 attached to the PTE’s tax return and Form 3893 to pay the tax, if paid by check. If the entity is required to pay electronically, there is no form.
While it is too late to do anything for the 2021 tax year, PTE’s have until June 15th to be eligible for the 2022 tax year. We recommend consulting with your CPA to verify that you qualify and determine if AB 150 makes sense for you and your business. The team at Trost Financial Consulting is available to join conversations with your accountant and can recommend CPAs, should you need one.