Everyone loves a PETAs followers of this blog will recall, I’ve written many times about the State and Local Tax (SALT) cap for itemized deductions. Individual Taxpayers have been limited to a maximum amount of $10,000 in deductions for this category regardless of how much they actually spend in a year on state income and property taxes. This restriction, compliments of President Trump’s signature tax act (Tax Cuts and Jobs Act of 2017) has hit Californians especially hard. In a previous post, I described a legitimate workaround that the IRS has blessed and that other states had enacted.

In a rare pro-taxpayer effort, California finally got with the program and passed AB 150 which allows for qualified entities to elect to pay state taxes at the entity level and pass that deduction to the owners, effectively circumventing the SALT limits. We now have the Pass-Through Entity Tax (PET) election that creates the framework to do this.

The PET election is available to S corporations, Limited Partnerships, General Partnerships, and LLC’s and can significantly reduce the owners’ Federal income taxes. The election for 2021 generally must be made by March 15, 2022. However, the timing of payments is important, and there are mathematical limitations on using the payment as a reduction of your California income taxes. Before making the election, you must do the math to determine if you will benefit enough from it to justify paying the tax in the first place.

If you have any questions about the PET please contact us and we can guide you through the process to determine what the implications are for your business.

Read more tax articles from Paul’s tax blog