February 17, 2022

Retroactive Changes to California’s Pass-Through Entity Tax and Other Credit Provisions

By Romeo Santos, CPA, Supervisor, Tax & Business Services

Retroactive Changes to California’s Pass-Through Entity Tax and Other Credit Provisions State & Local Tax

On February 10, 2022, California Governor Gavin Newsom signed Senate Bills 113 and 114 (“SB 113” and “SB 114”), providing changes to previously enacted legislation regarding the state’s elective pass-through entity (PTE) tax and other credit provisions.

Senate Bill 113

SB 113 expands the benefits of California’s elective PTE tax. Most notably, the PTE credit can now be used against a taxpayer’s tentative minimum tax (TMT), effective for tax years beginning January 1, 2021, making it retroactive to the 2021 tax year. The bill also allows single-member LLCs that own a pass-through entity to claim the PTE credit. In addition, partnerships with members who are also partnerships can now opt into the election, although the member partnership(s) cannot consent to the election.

Effective for tax years beginning January 1, 2022, the bill also changes the credit ordering, allowing credits for taxes paid to other states to be utilized before the PTE credit.

Additionally, SB 113 restores the ability to use net operating losses (NOLs) for California taxpayers with more than $1 million of income, and removes the $5 million limitation set by prior legislation related to the amount of certain credits that can be utilized, such as research and development credits (R&D), effective for the 2022 tax year.

SB 113 retroactively conforms California to the federal exclusion of Restaurant Revitalization Grants (fully) starting in tax year 2020 and Shuttered Venue Operator Grants (partially) starting in 2019.

Senate Bill 114

Along with SB 113, the governor also signed SB 114, requiring employers with more than 25 employees to provide supplemental paid sick leave for COVID-related reasons. The supplemental leave is in addition to employees’ regular paid sick leave, PTO, and vacation, allowing full-time employees to take COVID-19 related leave of up to 80 hours. The supplemental paid sick leave is retroactive to January 1, 2022, and expires September 30, 2022.

For questions about any of these updates or for further assistance, please contact your Marcum tax professional.