Ref: CA Assembly Bill 150 (IRS approval via IRS Notice 2020-75)

IMPORTANT: THIS ONLY APPLIES TO CALIFORNIA INDIVIDUALS WHOSE BUSINESS IS USING A PASS-THROUGH ENTITY SUCH AS AN S CORPORATION, PARTNERSHIP OR LLC.

Executive summary:

1. State and local tax deduction (SALT) is limited to $10,000 on the federal return itemized deduction. This effectively means that the state income tax paid via the taxpayer’s W2 is not a federal deduction.
2. If the election is made on the entity return, the entity pays tax on behalf of the shareholder/owner/partner (s/h) equal to 9.3% of the net income from the entity.
3. The s/h reduces CA income tax withholding on his/her W2 by the same amount.
4. The federal net income on Form K-1 is reduced the the amount paid to the state, effectively providing a deduction.
5. The s/h receives a state credit on his/her individual return for the amount paid on his/her behalf. This credit is NOT REFUNDABLE, but can be carried forward five years.

When is the DUE DATE of the payment?

1. For 2021 calendar year entity: March 15, 2022.
2. For 2022 through 2025: Greater of $1,000 or 50% of the prior amount due 6/15 of the following year and remainder by the March 15 filing date. (If this date is missed, the entity cannot use this election for that year).

IMPORTANT: For cash-basis individual shareholders (and most are)… THE ABOVE DUE DATES IN ITEMS 1 & 2 ABOVE WOULD CHANGE TO DECEMBER 31, 2021 AND DECEMBER 31, 2022 RESPECTIVELY (not March 15).