This month, Senate Bill 113 (SB 113) was signed into law by Governor Newsom and holds significant California tax law changes, comprised of the reinstatement of business tax credits and net operating loss (NOL) deductions, formerly limited by Assembly Bill 85 (AB 85) and the expansion of California’s pass-through entity (PTE) tax.

Reinstatement of NOL Deductions and Tax Credits Previously, AB 85 suspended the use of NOLs for tax years 2020-2020 for California taxpayers with a taxable income of at least $1 million, and AB 85 limited the use of business tax credits for tax years 2020-2022 to $5 million annually.

  • SB 113 now removes both limitations for the 2022 tax year.

Expansion of Elective Pass-through Entity (PTE)Formerly, for tax years, beginning on or after January 1, 2021, and before January 1, 2026, qualifying PTEs may annually elect to pay an entity-level state tax on income. Now, SB 113 expands the availability and benefit of the elective PTE tax and corresponding tax credit:

  • Amend the definition of “qualified entity” to include a partnership as an eligible partner, shareholder, or member.
  • Including guaranteed payments as qualified net income, so they qualify for the credit.2
  • Requiring the elective tax credit to be applied against the net tax after credits for taxes paid to other states, effective for tax years beginning on or after January 1, 2022.
  • Allow a business owned by individuals using a limited liability company that is disregarded for federal income tax purposes and meets certain conditions to elect the PTE tax and credit.
  • Remove a provision that prohibits the credits for PTE tax paid from reducing tax owned below a taxpayer’s tentative minimum tax, effective for tax years beginning on or after January 1, 2021.

The reinstatement of NOL deductions and tax credits and the expansion of elective pass-through entity can offer planning opportunities to those who qualify.

If you have questions on how the changes affect you and your business, please give us a call. Relax. We Got This.