It’s no secret that small businesses are subject to high tax rates, with one of the culprits being the Tax Cuts and Jobs Act (TCJA). But what some owners might not be aware of is a relatively new law designed to respond to this act and minimize the damage. This law, California AB 150, was created to provide relief to eligible parties. If you’re eligible, you won’t want to miss this. Keep reading to see if you qualify and how you can receive your entitled tax break.
What is California AB 150?
California Assembly Bill 150 was created in response to the Tax Cuts and Jobs Act (TCJA). The latter act, passed in December 2017, limited the State and Local Tax deduction (SALT), which had previously allowed taxpayers who itemized their deductions to deduct their income tax and thus receive excellent tax benefits. With the TCJA, a deduction that had once allowed taxpayers to deduct in full, now capped at $10,000. High-income, high-property states like California especially felt this limitation, and in 2021 they responded with AB 150.
What is the Small Business Relief Act?
The Small Business Relief Act is the part of AB 150 that directly addresses the Tax Cuts and Jobs Act. The other parts of AB 150 include extension of sales tax exclusions on diapers, menstrual hygiene products, a 15% tax credit on donations of fresh fruits and vegetables to food banks, and more. In this article, we’ll focus on the Small Business Relief Act and how it helps taxpayers.
The Small Business Relief Act serves as a workaround of the SALT cap. It lets eligible taxpayers pay an elective 9.3% tax on their income, which they can then claim as a nonrefundable credit on their personal tax returns.
Because AB 150 responds to the Tax Cuts and Jobs Act, it will become null and void should the TCJA be repealed, or upon its expiration in 2026.
Who qualifies?
Only pass-through entities- legal entities whose income goes directly to investors and owners- qualify for the elective tax. These include partnerships who file IRS Form 1065, and S corporations, who file IRS form 1120S. This effectively lowers the income on each shareholder’s K-1 and reduces their tax liability.
Who does not qualify?
Ineligibility is easy to determine- if it is not a pass-through entity, it doesn’t qualify. C-corporations or corporations where at least one partnership exists as an owner are ineligible for the elective tax. Self-employed individuals who file Schedule C’s also do not qualify.
How do I calculate the benefit of AB 150?
As of 2022, depending on entity type, California pass-through entities must pay a 1.5% tax on their net income or a minimum franchise fee.
Under the Small Business Relief Act, the 9.3% elective tax is in addition to the initial 1.5%.
Let’s look at an example.
Say an S-Corporation with a single shareholder has a net income of $350,000.
The 1.5% California PTE tax amounts to $5,250.
On top of that, the AB 150 adds a 9.3% elective tax. 9.3% of $350,000 brings us to a $32,550 tax credit.
The tax credit combined with the PTE tax comes to a total of $37,800. The $32,550 tax credit is used for a refund and, if greater than the net tax owed, carries over for up to five years.
When are taxes due for AB 150?
AB 150 taxes for the 2021 tax year are due by the filing deadline. For the following years, the tax is due in two installments. The first must be 50% of the tax or $1,000, the deadline being June 15th of the taxable year. The second must be paid by the tax deadline.
Payments must be made by the deadline; failure to do so, even in the event of extensions, will result in ineligibility for the elective tax. Members of an entity must file separately, but not all members need to consent for the elective tax to apply. Think before you act; the election is irrevocable until the next tax year.
Although the AB 150 aims to benefit taxpayers, entities are still subject to the tentative minimum tax. If the TMT is greater than the regular tax, the TMT must be paid, with the difference becoming a tax credit that is carried forward, but not immediately accessible.
What are the downsides to AB 150?
The AB 150 exclusively applies to pass-through entities, rendering individuals who receive W-2s, single-member LLCs, and self-employed individuals ineligible for the SALT workaround. The credit also does not benefit corporations or partnerships reporting a loss, and it can negatively impact the tax deduction given by the federal Qualified Business Income. Finally, though the tax credit carries over if greater than the net tax owed, we aren’t sure what happens to this credit.
Closing Thoughts
Since its inception, the TCJA has been an obstacle for pass-through entities seeking tax deductions; the California AB 150 is designed to overcome it. Its Small Business Relief Act in particular provides opportunities for eligible entities to receive a tax credit. Today, we helped you read the fine print to show if and how you can qualify for this deduction.
Does the AB 150 apply to you? Are you still unsure? You can contact us with these questions and more.
Looking for an independent fiduciary financial advisor who can advise you on investments, retirement, real estate, alternative assets, and taxes? Contact ACap Advisors & Accountants to schedule a free initial consultation. Our clients include individuals, small businesses, entrepreneurs, and anyone serious about saving and investing for their future.
