Governor Newsom is expected to sign SB 113 soon, which contains several tax-related changes that impact 2021 tax returns and the current filing season.

Expansion of the Pass-through Entity (PTE) Tax for Additional Relief from State and Local Tax (SALT) Deduction Limits In 2021, California established an elective PTE tax framework to allow certain California taxpayers to pay their California personal income tax in a way that provides relief from the current $10,000 federal limit on individual SALT deductions. While implementing the new framework, limitations were identified that would prevent taxpayers from realizing the full intended benefit of the PTE tax and subsequent credit. SB 113 address some of these issues:

  • For taxable years on or after Jan. 1, 2021:
    • Clarification that a taxpayer can apply the full PTE credit against their California tax liability as originally intended without limitation due to tentative minimum tax.
    • Expansion of eligible taxpayers to include tiered partnerships and those that own their share of a business through a disregarded entity, such as a single-member LLC.
    • Clarify that PTE tax provisions can apply to guaranteed payments as part of the distributive share of net income from an entity.
  • For taxable years beginning on or after Jan. 1, 2022, credits for taxes paid to other states (the Other State Tax Credit, or OSTC) will be used prior to the PTE credit to help prevent unused PTE for multistate taxpayers.

Conformity to Federal Tax Treatment for Relief Grants For taxable years on or after Jan. 1, 2021, SB 113, consistent with federal tax law, exempts grants from the Shuttered Venue Operator Grant (SVOG) and the Restaurant Revitalization Fund (RRF) for California income tax. The bill also addresses California tax rules for a bill credit received by a customer from certain water and utility providers.

Restoration of Net Operating Loss (NOL) Deduction and Business Incentive Tax Credits The 2020 state budget package originally limited the ability of businesses to use NOLs and certain tax credits for tax years 2020, 2021 and 2022. SB 113 would restore the NOL and business incentive tax credits for the 2022 tax year so taxpayers can realize the full value of these tax benefits.

NOT Included: Adjustments to State Tax Rules to Address PPP Extension Act of 2021 The current legislative language does NOT address state tax rules for Paycheck Protection Program (PPP) loans issued under the PPP Extension Act of 2021, which extended the program from March 31, 2021, to June 30, 2021. Currently, California only addresses PPP loans issued prior to March 31, 2021.

If you have questions, please contact your Linkenheimer CPA.