New Bill is Work-Around to Federal State and Local Tax Deduction

Senators Mike McGuire (D- Healdsburg,) and Anna Caballero (D-Salinas) made amendments on March 9 to their Senate Bill 104, which is a “work-around” to the federal state and local tax (SALT) limitation. The bill would add and repeal Section 17052.10 and add and repeal Part 10.4 (commencing with Section 19900) of Division 2 of, the Revenue and Taxation Code.

Section One of the bill would add Revenue and Taxation Code Section 17052.10. This new section of law would provide a tax credit for five years from January 1, 2021 through December31, 2025. The credit amount would be 94.9% of the qualified amount. The credit would have a 3-year carryforward. The new section would also define the terms: “electing qualified entity,” “qualified amount,” and “qualified taxpayer.”

The qualified amount is 9.3% of the qualified taxpayer’s pro rata share of income subject to the election made by an electing qualified entity. A qualified taxpayer includes a partner, shareholder, or member of an electing qualified entity. It does not include partnerships. This new section would remain in effect through December 1, 2026 and then would be repealed.

Section Two of the bill would add Part 10.4, which would be titled “Small Business Relief Act.” It would provide for five years, from January 1, 2021 through December 31, 2025, that a qualified entity doing business in California and required to file a tax return may elect to annually pay an elective tax on its gross income that is computed at a rate of 9.3% for the tax year for which the election is made.

In addition, for the same 5-year period, a qualified entity doing business in California and required to file a tax return may elect to annually pay an elective tax of 9.3% on its net income for the tax year for which the election is made. A qualified entity may elect to pay the elective tax and all partners, shareholders, and members of the qualified entity would be bound by the election made for that tax year.

Moreover, the election would be irrevocable and be made on an original, timely filed return for the taxable year of the election in the form and manner as prescribed by the Franchise Tax Board. A “qualified entity” would be defined as a partnership, limited partnership, limited liability company taxed as a partnership, limited liability partnership, and “S” corporation.

The new section would also provide that the elective tax would be due and payable on or before the due date of the return without regard to any extension of time for filing the return, for the taxable year of the election pursuant to Section 19900. The Franchise Tax Board would also be authorized to adopt regulations that are necessary or appropriate to implement this new law.

Finally, this new section of law would remain in effect only until December 1, 2026 and then would be repealed.