On February 9, 2022, Governor Newsom signed the following two bills:
SB 113: Passthrough Entity Elective Tax
This bill is the much anticipated “fix” to the Passthrough Entity Elective Tax (PEET) Credit. It expands the benefits of making a PEET payment by:
- Repealing the 7% tentative minimum tax limitation on the PEET Credit. This makes the tax benefit more immediate for those who chose to make a payment in December 2021 to offset their CA tax liability for 2021. It will also make it more likely that a 2022 election will be beneficial;
- Allowing partnerships/S corporations/LLCs with owners that are partnerships to make the election (although the tax can’t be paid on behalf of the partnership owner). This opens the PEET as a tax planning tool for more taxpayers;
- Allowing SMLLCs that are passthrough entity owners to claim the PEET Credit (although SMLLCs are still prohibited from making the election themselves); and
- Changing the credit ordering rules related to the PEET Credit to increase the benefit for taxpayers that claim the Other State Tax Credit (beginning with the 2022 tax year). This puts the Other State Tax Credit before the PEET Credit in ordering and means that taxpayers fully benefit from their Other State Tax Credit first, before utilizing the PEET Credit.
Except as noted, these changes will apply to the 2021 tax year. SB 113 also:
- Fully conforms to the federal exclusion of Restaurant Revitalization Grants, retroactive to the 2020 tax year;
- Partially conforms to the federal exclusion of Shuttered Venue Operator Grants, retroactive to the beginning of the 2019 tax year; and
- Repeals the $5 million business credit limitation and NOL suspension for higher income taxpayers for the 2022 taxable year. This is a big win for taxpayers who suffered losses in the past.
SB114: Paid Sick & Family Leave Extension
This bill requires employers with more than 25 employees to provide up to 80 hours of COVID-19–related paid supplemental sick and family leave, retroactive to January 1, 2022, through September 30, 2022. This is in addition to the mandated 24 hours of regular paid sick leave already required under California law. The bill does not provide any California tax benefits or other compensation to employers for providing these benefits, and the federal credit for COVID-19–related paid sick leave benefits expired on September 30, 2021. Without government reimbursement, this will be a costly measure for employers in 2022.
Next Up – Extensions
We anticipate that most 2021 passthrough entity returns (partnerships, LLCs taxed as partnerships, and S Corporations) will need to be extended. There are several reasons for this – all of which are caused by the taxing authorities and Congress:
- First, even though it appears we have some good news and clarity on the PEET credit, there remains several filing issues, including final forms, etc. that create uncertainty in how to report the credit, the timing of elections and the means of making payments and getting refunds of overpayments.
- Second, there may be additional legislation to provide relief to California taxpayers whose 2nd PPP loan funding took place after March 31, 2021. It is California FTB’s current position that these are fully taxable at forgiveness without relief provided by AB 80.
- Additionally, new Schedules K-2 and K-3 are being designed and required for 2021 passthrough returns, each of which are about 19-20 pages long. These schedules relate to reporting the foreign activities of partnerships and S corporations to its owners but, according to the IRS, must be filed even if the passthrough entity had no foreign activity to enable the recipient of the K-3 to properly complete their return. There may be some relief from filing that is available but there is uncertainty still. The forms are not yet finalized so they can’t be e-filed at this time. E-filing of the forms may not be available until late June and prior to that must be uploaded as PDF attachments. In typical IRS fashion, they’ve rolled out a new requirement with little guidance and new forms that aren’t ready to be e-filed, along with threats for noncompliance.
- Finally, the Build Back Better Act or portions of it may be resurrected after the original due date of your returns. While we don’t anticipate any law to be retroactive to 2021, you may want to make certain elections or take positions on your 2021 returns to reflect the 2022 law change. For instance, if there is a large tax increase, you may want to make an election to defer deductions into 2022 or accelerate income into 2021 if possible.