The 2017 Tax Cut and Jobs Act limits individuals state and local tax deduction to $10,000 a year through 2025. California passed into law a workaround for tax years 2021- 2025.
Qualifying pass-through business owners can separately elect to pay a 9.3% entity level tax on the owner’s share of the company’s qualified taxable income which will be allowed as a federal tax deduction on the entity return. Owners who participate will receive a credit on their California individual tax return equal to the 9.3% tax paid at the entity level. The credit, if unused, will carry forward for five years. The election is an irrevocable annual election in which the tax must be paid by the original due date for the 2021 tax year and a base amount paid by June 15th of the following tax years in order for the election to be valid.
Qualified entities include Partnerships and S-Corporations but exclude Publicly traded partnerships, an entity that is permitted or required to be in a combined reporting group and an entity that has a partnership owner. Eligible passthrough entity owners include Individuals, Trusts, Estates and Corporations.
For example, a calendar year S-Corporation owner who generates $1 million of 2021 California business taxable income could potentially pay $93,000 in individual California taxes in which most or all would not be allowed as a deduction for federal tax purposes. If the owner elects the state tax workaround the $93,000 would be paid by the S-Corporation to California by March 15, 2022 and the business would deduct the $93,000 for federal tax purposes and provide a credit against the Individual California taxes for the $93,000 paid. If the individual is in the 37% tax bracket, the work around would save $34,410 in individual federal taxes.
The tax savings can be tremendous and it is imperative that the payment deadlines be carefully monitored.
Please contact your tax advisor at WFY to discuss additional details regarding these tax benefits. Click here to contact a WFY tax advisor.
Wright Ford Young & Co. is headquartered in Irvine, CA and is the largest single office CPA firm in Orange County. WFY is a full service corporate accounting firm offering audit, tax, estate and trust, and business consulting services to closely held company and family business owners. More information about our Firm can be found at www.cpa-wfy.com