Governor Gavin Newsom (D) on 9 February 2022, signed Senate Bill (SB) 113, which includes taxpayer-friendly changes to the California pass-through entity tax (PTE tax). These changes include:
- allowing a qualified entity to have a partnership partner,
- allowing a taxpayer holding their interest via a disregarded single member limited liability company (SMLLC) to be a qualified taxpayer,
- guaranteed payments included in the tax base,
- allowing the PTE tax credit to reduce regular tax below the tentative minimum tax, and
- changing the ordering of the PTE credit utilization to be after the other state tax credit for the 2022 tax year.
The amendments are retroactive to 1 January 2021 with the exception of the credit ordering rule. In addition, SB 113 removes the AB 85 California net operating loss (NOL) and tax credit limitations for the 2022 tax year, one year earlier than originally enacted.
Takeaway: SB 113 significantly expands the population of business entities eligible to make the PTE election and alleviates various concerns around the utilization of the PTE tax credits. However, SB 113 did not address all taxpayer recommendations, such as making the credit refundable, reducing the nonresident withholding requirement, and increasing the PTE tax rate to maximize the benefit. As with any tax election, taxpayers should examine their own tax situation to determine whether a PTE tax election would be beneficial.