On Feb. 9, California Gov. Gavin Newsom signed legislation that, among other COVID-19 relief measures, expands the pass-through entity (PTE) tax, restores the net operating loss (NOL) deduction and business tax credits, and provides relief for restaurant and venue operators, just in time for the March 15, 2022, filing deadline.
Pass-through entity (PTE) tax
The legislation expands the PTE tax:
Beginning on or after Jan. 1, 2021, by:
1. allowing the PTE tax to reduce tax owed below the taxpayer’s California tentative minimum tax (TMT);
2. allowing a disregarded entity (i.e., SMLLC) that is a partner or shareholder in a pass-through entity to claim the credit; however, the election must be made by the owner of the SMLLC;
3. allowing pass-through entities that have partnerships as one of their owners to make the election and file a PTE tax return; however, tax still cannot be paid on behalf of the partnership owner; and
4. including guaranteed payments made to partners in the entity’s qualified net income for purposes of computing the tax.
Beginning on or after Jan. 1, 2022:
5. the PTE tax credit will be applied against the net tax after credits for taxes paid to other states.
Relief for restaurants and shuttered venues
The legislation, retroactively to the 2020 tax year, conforms California’s tax treatment of the federal Restaurant Revitalization Fund (RRF) grants. In addition, California will partially conform to the Shuttered Venue Operators Grants (SVOG) federal exclusion, retroactively to the 2019 tax year.
NOLs and business credits
The legislation restores for the 2022 taxable year the NOL deduction currently suspended for businesses with more than $1 million in income, and lifts the $5 million business tax credit limitation.
What does CohnReznick think?
The tax breaks in this piece of legislation likely will benefit many. All taxpayers should review the new provisions to see how the changes may impact their specific tax positions/calculations and if amended returns would be beneficial.
Subject matter expertise
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
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