SALT workaround

Question 1

What does SALT stand For

Answer 1

State and Local Tax

Question 2

What is the CA statute

Answer 2

AB150

Question 3

Who qualifies for the work around

Answer 3

people with pass through incomes

Question 4

How does the SALT workaround work

Answer 4

• 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

Question 5

Who are qualified owners

Answer 5

• Partnerships
• LLC with multiple members treated as a partnership
• S Corporations

Question 6

Who are disqualified entities

Answer 6

• no entities that are part of a combined reporting group

- pass through entity whose owners are publicly traded partnership

Question 7

What must the owners consent to

Answer 7

They consent that the entity will make the election to pay the tax rate of 9.3% on the owners share of net income

Question 8

Can each member elect separately

Answer 8

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.

Question 9

How is the elective tax calculated

Answer 9

the elective tax is based on the sum of the qualified net income

Question 10

When is the elective tax due

Answer 10

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)

Question 11

What happens if you don’t pay on time

Answer 11

• the election may be deemed invalid if not paid on time

Question 12

What happens to owners who make the election

Answer 12

They receive a nonrefundable credit against their California income tax liability

Question 13

What if your credit exceeds your California income tax liability

Answer 13

The excess can be carried over for up to 5 years

Question 14

What happens to owners who make the election

Answer 14

They receive a nonrefundable credit against their California income tax liability

Question 15

What is your credit exceeds your California income tax liability

Answer 15

The excess can be carried over for up to 5 years

Question 16

What happens to the entity if they make the election

Answer 16

• 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

Question 17

What is the net effect

Answer 17

The credit ensures that the same net income is not taxed twice

Question 18

Benefits

Answer 18

Massive for pass-through entity owners who can take advantage

Question 19

Qualified Entity II

Answer 19

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

Question 20

Can you have a partnership as an owner

Answer 20

no - you are disqualified

Question 21

Can S Corp be owners of the pass through entity

Answer 21

Yes - S Corps can be owners and still qualify

Question 22

Can C Corps be owners of the pass through entity

Answer 22

Yes - C Corps can be owners

Question 23

Why would an owner elect out

Answer 23

If their tax bracket is less than 9.3% - their net taxable income will be lower than the realized at the entity level

Question 24

How should S Corps be weary of not uniformly electing

Answer 24

It could create a second class of stock which could invalidate S-Corp status

Question 25

Why would an owner elect out

Answer 25

If their tax bracket is less than 9.3% - their net taxable income will be lower than the realized at the entity level

Question 26

Who is able to receive the tax credit

Answer 26

individuals, estates and trusts