By: Paul Horn, CFP®, CPWA®, Senior Financial Planner
We have seen recent legislation pass in California called Assembly Bill 150 (AB 150) that will provide a way for some business owners to be able to get around the $10,000 cap on the itemized deduction of state and local taxes (SALT) on federal tax returns. Until the Tax Cuts and Jobs Act (TCJA) passed in 2018, individuals were able to deduct all state and local taxes (SALT). Once the TCJA was passed there is now a cap of $10,000 per year and this cap hits many individuals living in California (CA) where home values and local taxes are large.
Understanding AB 150
The legislation passed for tax years 2021 – 2025, will allow business owners of qualified pass-through entities (S-Corporations and LLCs) to elect to pay a 9.3% tax on qualified net income at the entity level. The business owner is then eligible for a credit against their individual California income tax in an amount equal to their pro rata share of the elective tax paid by the entity (See IRS Notice 2020-75). As a result, you may indirectly increase your annual state tax deduction on your personal income tax return, in excess of the $10,000 SALT deduction limitation.
How To Take Advantage of AB 150
For business owners of S-Corporation or LLC, you will want to discuss this with us and your tax advisor to make sure that it makes sense. The irrevocable election is made on an annual basis. If your business is a sole proprietor this would be a good time to review and see if it makes sense to convert to an LLC or S-Corporation this year.
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