While consideration should be made for owners who may be in a California tax bracket less than 9.3% for 2021, as these individuals may not be able utilize all of the tax credit in the current year, the five-year period to carry it forward could mitigate this concern. Additionally, some taxpayer’s California income level varies from year-to-year. For these individuals, proper tax planning can help maximize one’s benefits.
Some owners for individual considerations may want to withhold consent to have their share of the PTE's income taxed at the entity level, but it does not stop the entity from making the election on behalf other owners. This could, however, prove to be a logistical challenge for the PTE.
For individuals who are not California residents or only live in the state for part of the year, there are some non-California considerations related to the SALT workaround that are beyond the scope of this article. Do note these individuals can still consent to have their share of the PTE's California tax paid at the entity level and claim the credit against their California tax liability. These individuals should however consult with a specialist before making any decisions.
For individual sole proprietors and single-member LLC (SMLLC) owners, there is an opportunity to restructure their operations to benefit from the SALT workaround. For example, if an SMLLC owner brought on a 1% partner, the now multi-member LLC could be taxed as a partnership. This new LLC structure could then elect the California SALT workaround.
Is The SALT Workaround Right For Your Company?
Utilizing California's SALT workaround law for eligible pass-through entities could significantly reduce the owners’ federal income tax bills. However, owners must consult with a qualified accountant to see if this solution is suitable for the entity. Additionally, owners will need to examine partnership or LLC operating agreements to determine if a SALT workaround election is allowed, and if so, who is authorized to make the decision. S corporations in particular will require attention in the case that one or more owners does not consent. The tax community is still awaiting further guidance from the IRS and the California Franchise Tax Board regarding final rules, so note that the specifics may look slightly different from what we know now.
Elaine Leung is a director in the tax practice at BPM, one of the 50 largest public accounting and advisory in the U.S, where she serves as a leader in the firm’s State and Local Taxes (SALT) team.
With over 20 years of experience in individual, corporate and partnership taxation, Bob McGrath is a director in the tax practice at BPM. He works primarily with high-net-worth individuals to craft personalized strategies.