Pass-through entity elective tax updateMarch 2022 Tax News

Senate Bill 113

On February 7, 2022, the California legislature passed SB 113, which, among other provisions, amended the Pass-through Entity Elective Tax and the Pass-through Entity Tax Credit. The following changes apply for taxable years beginning on or after January 1, 2021:

• The Pass-through Entity Tax Credit can reduce the amount of tax due below the tentative minimum tax.
• Qualified net income includes a qualified taxpayers' guaranteed payments received from the qualified entity subject to California personal income tax.
• A qualified entity can have a partnership as a direct owner.
• A qualified taxpayer who is a partner, member, or shareholder of a qualified entity can be a disregarded single member limited liability company (SMLLC), as long as the disregarded SMLLC is solely owned by an individual, fiduciary, estate, or trust subject to California personal income tax.

Additionally, for taxable years beginning on or after January 1, 2022, the Pass-through Entity Tax Credit should be applied after the other state tax credit.

FTB is currently evaluating this new legislation and working to provide updated guidance to taxpayers. For more information on the pass-through entity elective tax and tax credit, please visit our website at Pass-through entity elective tax | FTB.ca.gov and Help with pass-through entity elective tax | FTB.ca.gov.