State And Local Tax (SALT) Workaround is coming to California

7/23/2021

On July 16, Governor Newsom signed Assembly Bill 150 enacting changes to the Revenue and Taxation Code, which will provide certain California taxpayers some relief from the current $10,000 Federal limit on individual state and local tax (SALT) deductions. 
 
Background
Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers had been able to deduct an unlimited amount of state and local property, income and sales taxes from their federal returns. For people in states with higher tax rates, it meant being able to deduct tens of thousands of dollars from their federal taxes. The average deduction in California was more than $18,000. The TCJA capped the deduction at $10,000 through 2025.
 
California now joins the growing list of states to create a workaround of the $10,000 cap on the federal deduction for state and local taxes paid for pass-through entities. Many real estate investment entities are typically organized as pass-through entities that will benefit from the tax treatment offered by the law now proposed for California.  So far, Alabama, Arkansas, Connecticut, Maryland, Louisiana, Oklahoma, Rhode Island, and Wisconsin have approved workarounds while Arizona, Georgia, Idaho, and New York recently passed legislation. Illinois, Massachusetts, North Carolina, and South Carolina are debating similar bills.
 
How it would work
For taxable years beginning on or after January 1, 2021, and before January 2, 2026, the new legislation allows a partnership or S Corporation to elect to pay a tax at a flat 9.3% rate on its net income for the tax year.  The tax would then be deductible by the partnership or S Corporation.  The partner or shareholder will be allocated a tax credit on their K-1 that they can apply towards their personal income tax.  This effectively allows individuals, who are partners, members, and shareholders of small businesses to deduct SALT beyond the current federal cap.
 
RINA is currently waiting on further guidance from the Franchise Tax Board on implementation of the new law.  We will provide further updates as they are available.  If you have questions about how this may affect your business, state tax filings, or operations, please contact your RINA professional.

Contact RINA

Join Our Mailing List