SALT workaround Flashcards
What does SALT stand For
State and Local Tax
What is the CA statute
AB150
Who qualifies for the work around
people with pass through incomes
How does the SALT workaround work
- From Jan 2021 - 2026
- can make an election
- the election is irrevocable
- entities can pay the tax of the owners share of net income
- This means that owners will be able to bypass the otherwise applicable fed cap limitation
Who are qualified owners
- Partnerships
- LLC with multiple members treated as a partnership
- S Corporations
Who are disqualified entities
- no entities that are part of a combined reporting group
- pass through entity whose owners are publicly traded partnership
What must the owners consent to
They consent that the entity will make the election to pay the tax rate of 9.3% on the owners share of net income
Can each member elect separately
Yes - each member can make a different selection
If one member does not elect to be included the entity can still elect to pay the PTE for others.
How is the elective tax calculated
the elective tax is based on the sum of the qualified net income
When is the elective tax due
for 2021 if you elect- the tax is due on March 15th - no extension
- 2022 - 2026 the tax is due in two installments.
Installment 1 - June 15th of 2022 ( for 2022) of the current tax year
Installment 2 - The due date of the tax return-March 15, 2023 ( for tax year 2022)
What happens if you don’t pay on time
- the election may be deemed invalid if not paid on time
What happens to owners who make the election
They receive a nonrefundable credit against their California income tax liability
What if your credit exceeds your California income tax liability
The excess can be carried over for up to 5 years
What happens to owners who make the election
They receive a nonrefundable credit against their California income tax liability
What is your credit exceeds your California income tax liability
The excess can be carried over for up to 5 years
What happens to the entity if they make the election
- The entity takes the deduction for the state tax paid -WITHOUT limit.
- This reduced the federal taxable income passed through to the owners
- The owners then are able to get a California income tax credit for the taxes paid by the entity
What is the net effect
The credit ensures that the same net income is not taxed twice
Benefits
Massive for pass-through entity owners who can take advantage
Qualified Entity II
1 - an S-corp taxed as a partnership (Multi member LLC) whose owners are - individuals, corporations, trusts and estates.
- if you have one member who is not eligible then the entity is disqualified
Can you have a partnership as an owner
no - you are disqualified
Can S Corp be owners of the pass through entity
Yes - S Corps can be owners and still qualify
Can C Corps be owners of the pass through entity
Yes - C Corps can be owners
Why would an owner elect out
If their tax bracket is less than 9.3% - their net taxable income will be lower than the realized at the entity level
How should S Corps be weary of not uniformly electing
It could create a second class of stock which could invalidate S-Corp status
Why would an owner elect out
If their tax bracket is less than 9.3% - their net taxable income will be lower than the realized at the entity level
Who is able to receive the tax credit
individuals, estates and trusts
