AB 150

On July 16, 2021, Gov. Newsome signed California Assembly Bill 150 (AB 150). AB 150 allows certain pass-through entities to annually elect to pay an elective tax in the amount of 9.3% of the pro rata share or distributive share of the entity's partners, shareholders, or members (collectively referred to as owners). These owners can then use their share of the taxes paid at the entity-level, as a nonrefundable tax credit against their CA individual taxes. The benefit of paying the tax at the entity-level is that the business gets 100% tax deduction, which will then cause the owner’s federal taxable income to be less, thus acting an effective work-around to current State and Local Tax (SALT) cap of $10,000.

Some pass-through entities (PTE) may be ineligible if they are owned by another PTE, or they’re publicly traded. In cases where a PTE is ineligible because it is owned by another PTE, you’d still want to analyze the parent’s entity to see if it makes sense to make the election there.

For high-income earners (those in the CA 10.3% and higher tax brackets) who itemize on their federal Schedule A, the election is a no-brainer because you’ll get an immediate federal tax benefit the first year you make the election, and you’ll use the entire CA nonrefundable credit. For those in lower tax brackets or who don’t itemize, the decision is harder, though in most cases you’ll still see a benefit over 1 to 3-year period.

Any amount of the nonrefundable credit that is no use can carry forward for up to 5 years.

Eligible tax years are those between January 1, 2021, and before January 1, 2026.