2022-5: Passthrough entity elective tax fix and other economic relief on its way? - Spidell

2022-5: Passthrough entity elective tax fix and other economic relief on its way?


The long-awaited fix to AB 150’s passthrough entity elective tax has been introduced in the California Legislature. If actually enacted in its current version, AB 87/SB 113 would make a number of taxpayer-friendly changes to the passthrough entity elective tax, retroactive to the beginning of the 2021 tax year, including:

  • Removing the tentative minimum tax limitation for purposes of computing the amount of Passthrough Entity Elective Tax Credit that may be claimed;
  • Allowing qualified entities to make the election even if one of the owners is a partnership (although the tax could still not be paid on behalf of the owners that are partnerships);
  • Allowing qualified entities to pay the tax on behalf of owners that are single member LLCs owned by individuals, estates, or trusts, although SMLLCs would still be ineligible to make the election themselves; and
  • Including guaranteed payments made to partners in the entity’s qualified net income for purposes of computing the tax.

AB 87/SB 113 also provides additional relief unrelated to the passthrough entity elective tax, including, but not limited to:

  • Repealing the $5 million business credit limitation and NOL suspension rules for the 2022 taxable year;
  • Excluding Restaurant Revitalization Grants from gross income and allowing expenses paid with these grants to be fully deducted, retroactive to taxable years beginning on or after January 1, 2020; and
  • Excluding Shuttered Venue Operator Grants from gross income, retroactive to taxable years beginning on or after January 1, 2019, and allowing expenses paid with these grants to be deducted unless the taxpayer is a publicly traded company, or does not meet the 25% gross receipts reduction threshold (the same used for second-draw PPP loan eligibility).

Noticeably absent from the bill is conformity to the federal Paycheck Protection Program (PPP) loan forgiveness treatment for PPP loans made after March 31, 2021.

The bill has only been introduced and has not yet been voted on. However, these proposals were all included in the Governor’s proposed budget and he requested that these provisions be acted on before March 15, 2022. We will keep you posted on any further developments.

The text of the bills as introduced can be found at:

https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB87

https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220SB113

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