California Taxpayers to Benefit from Expanded SALT-CAP Workaround, Corporate Breaks
On February 9, 2022, Governor Gavin Newsom signed SB 113, enacting several taxpayer-friendly updates for 2022. Specifically, the state estimates $6.1 billion in savings to taxpayers due to increases in the amount of potential Pass-through Entity Elective Tax (PEET) credits and who can claim those credits; the removal of the suspension on NOLs and R&D credits for taxpayers for the 2022 tax year; retroactive conformity to certain federal relief provisions for tax year 2020; and increased film industry tax credits.
Specifically, under SB 113:
- Businesses will be able to fully utilize NOLs and R&D credits for the tax year 2022.
- There will be expanded eligibility and application of California’s Pass-through Entity Elective Tax (PEET) through several new provisions:
- Qualified net income now includes guaranteed payments.
- MGO Insight: This will significantly increase the value of the PEET for owners/operators of pass-through service providers.
- Individual taxpayers can apply the PEET state credit against tentative minimum tax.
- MGO Insight: By removing the 7% tentative minimum tax threshold, more of the PEET credit can be used in a given year, resulting in less carryovers and less concerns about electing into the PEET in consecutive years.
- Passthrough entities with owners that are partnerships are now eligible to make the PEET election.
- SMLLCs that are pass-through entity owners can now claim the PEET credit.
- MGO Insight: By removing the limitation on partnership owners and SMLLCs, more pass-through businesses will be able to benefit from the PEET including lower-tier partnerships.
- New credit usage ordering rules increase the benefit for taxpayers that claim the Other State Tax (OST) Credit.
- MGO Insight: OST credits are now specifically utilized before PEET credits, which should significantly reduce credit leakage for taxpayers with income in multiple states. (Prior to this, there was ambiguity on the ordering of credits and concerns that certain OST credits would not be able to be fully utilized.)
- The law also includes some beneficial retroactive relief:
- California will fully conform to the federal treatment of Restaurant Revitalization grants, retroactive to the 2020 tax year, and partially conform to the federal exclusion of Shuttered Venue Operator grants, retroactive to the 2020 tax year.
- Producers of qualified motion pictures benefit from increased flexibility to use sales & use tax credits against income taxes and sales & use tax; the prohibition period for this benefit has been shortened to only the 2020 and 2021 tax years. In addition, certain producers will have the ability to obtain an immediate refund for the 2021 tax year on sales & use tax in excess of the $5 million cap.
In addition to the tax benefits signed into law by SB 113, Gov. Newsom also signed SB 114, which creates COVID leave rules for 2022 that should benefit California workers:
- Employers with more than 25 employees will be required to provide up to 80 hours of COVID-19-related paid supplemental sick and family leave for the period January 1, 2022 (retroactive) through September 30, 2022. No additional tax benefits or credits have been provided in relation to this additional requirement.
With higher-than-anticipated tax revenues during the COVID pandemic, California improved the availability of various tax benefits, resulting in significant potential tax savings for California taxpayers in 2022 and later tax years that should help boost the state’s economic recovery.