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California State Capitol. (Photo: Kevin Sanders for California Globe)

SB 851 Signed by Gov. Newsom: Small Business Relief Act

SB 851 is California’s work around the federal government’s limitation of state and local tax deduction limitations

By Chris Micheli, September 29, 2022 6:21 am

On September 28, Governor Gavin Newsom signed into law Senate Bill 851 by Senator Anthony Portantino (D-La Canada-Flintridge), California’s effort to work around the federal government’s limitation of $10,000 on deducting state and local taxes on one’s federal return. SB 851 modifies the pass-through entity elective tax.

The bill amends Revenue and Taxation Code Sections 17052.10 and 19904, which is the Small Business Relief Act (SBRA). The SBRA applies to tax years beginning January 1, 2021 and applies through January 1, 2026, to allow a partnership of Subchapter S corporation meeting specified criteria to elect to pay a tax on net income.

The SBRA also allows a credit for a partner, shareholder, or member of an entity that elects to pay this tax upon a percentage of the person’s pro rate share or distributive share of income subject o the tax paid by the entity. State law provides a credit against taxes imposed, not to exceed the net tax due, for residents for taxes paid to another state on their income derived from sources within that state.

SB 851, beginning January 1, 2022 and before January 1, 2026, increases the maximum credit allowed to residents for the taxes paid to another state by the amount by which their net tax is decreased by the credit allowed to a partner, shareholder, or member of the entity that pays the elective tax under the SBRA.

Section 1 of the bill amends Revenue and Taxation Code Section 17052.10 to add a new subdivision (e) that provides: “For each taxable year the credit is allowed, for purposes of Sections 18001 and 18002, “‘net tax’ (as defined by Section 17039) payable under this part” shall be increased by the amount of credit under this section that reduced the “net tax,” as defined in Section 17039, in that taxable year.”

In addition, this new subdivision (e) provides that “This subdivision shall apply for taxable years beginning on or after January 1, 2022, and before January 1, 2026.” And that “Section 41 shall not apply to the expansion of existing tax expenditures resulting from application of this subdivision.”

Section 2 of the bill amends Revenue and Taxation Code Section 19904 to make a technical change. Section 3 of the bill specifies that this bill is a tax levy and would go into immediate effect.

Finally, Governor Newsom attached a “signing message” to SB 851. It reads as follows:

“To the Members of the California State Senate: I am signing Senate Bill 851, which makes technical changes that will allow taxpayers paying the Elective Pass-Through Entity Tax to fully utilize their Other State Tax Credit. These changes are clarifying of actions made this year through SB 113 {Chapter 3), a budget trailer bill. Although this modification may result in a revenue reduction, I am signing this bill to clarify implementation so the Franchise Tax Board can execute the program in a manner that is consistent with previous legislative action. Maintaining structural balance and resiliency of the state budget is on ongoing challenge. In the future, bills with a significant fiscal impact, and particularly tax law changes, should be considered and accounted for as port of the annual budget process. Sincerely, Gavin Newsom”

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