Recent California Tax Law Changes Can Benefit Business Owners and Employees

Recently enacted California tax legislation included both good news and bad news for business owners. Senate Bill 113 (SB 113) contained a number of key and favorable changes made retro-active for the 2021 tax year.  California Senate Bill 114 (SB 114) reinstated a mandatory COVID-19 supplemental sick leave requirement for employers.

Expansion of Pass-Through Entity (PTE) Elective Tax (SB 113)

As more fully discussed in a previous blog, California Enacts a Pass-Through Entity Tax, the PTE allows a pass-through entity (partnership or S-corporation), with qualified taxpayers, to pay an elective entity-level tax on their California income. This then creates a deduction against federal ordinary income (in the year the tax is paid) and the partners or shareholders receive a credit on their personal California income tax returns.

SB 113 made modifications to the elective California PTE tax and credit, which is available for the years 2021 through 2025.

SB 113 contains the following changes effective for 2021 (unless noted otherwise):

  • Allows the PTE tax credit to reduce the California tax liability below the tentative minimum tax. This removes a limitation that restricted the use of the credit.
  • Requires guaranteed payments received by partners to be included in the “qualified income” base used to determine the elective tax and tax credit. This creates a larger credit and federal tax benefit.
  • Expands the PTE tax availability to entities that have a partner or shareholder who is a partnership.
  • Allows single-member LLCs (SMLLCs) that are pass-through entity owners to claim the credit. However, SMLLCs remain ineligible from actually making the election themselves.
  • Beginning in 2022, the PTE credit will be applied against the net California tax after taking into account the credit for tax paid to other states. This effectively will change the credit ordering rules to increase the benefit of claiming the Other State Tax Credit on California tax returns.

Other Changes Made by SB 113

Previous legislation suspended the use of Net Operating Losses for high income taxpayers in 2022 and instituted a $5 million cap on the use of tax credits. SB 113 repealed both of these restrictions.

Effective 2020 California now has federal conformity to the treatment of Restaurant Revitalization Grants and effective 2019 partial conformity to the treatment of Shuttered Venue Operator Grants.

Revival of COVID-19 Supplemental Paid Sick Leave

Senate Bill 114 (SB 114), requires private employers that have more than 25 employees to provide to their California employees paid sick time (up to 80 hours) for COVID-19 related absences.

The provisions of this sick leave program include:

  • The program is effective January 1st, 2022 to September 30th
  • The 25 employee test is based on a headcount not full-time equivalents.
  • Leave under this program is in addition to any sick leave currently provided by the employer
  • Unlike the COVID-19 sick leave programs in effect in 2020 and 2021, this program does not contain any tax benefits or credits to employers who are required to provide this supplemental sick leave.
  • Employers must notify employees of this benefit and disclose hours used on pay statements, even if no hours have been used.

Contact us to further explore how these changes will impact your business.