The expansion of qualified entities in California means businesses should reevaluate the potential benefits of the state’s PTE credit.
SB 113 became law in California in February 2022, enacting several pass-through entity tax (PTE) changes. These changes include:
- Includes a partnership as an eligible partner, shareholder, or member for purposes of a qualified entity
- Allows a limited liability company (LLC) that is disregarded for federal tax purposes and meets specified criteria to be included in the definition of a qualified taxpayer
- Specified guaranteed payments can be counted as qualified net income
- Allows elective tax credit to reduce the regular tax below the tentative minimum tax, and
- Beginning on or after January 1, 2022, the elective tax credit must be applied against the net tax after credits for taxes paid to other states.
Significantly, these changes are retroactive to January 1, 2021, except for the final bullet point on the elective tax credit. SB 113 also reinstates the net operating loss (NOL) deduction and would remove the above-described temporary limitation on allowable credits, for taxable years beginning on or after January 1, 2022.
Entities that wish to take advantage of the California PTE credit for the 2021 tax year must do so on or before March 15, 2022 (i.e., a timely filed return, including extensions). Because of the expansion of qualified entities, businesses that had once written off the opportunity need to evaluate the potential benefit available to its members or shareholders and timely comply.