California AB 150: What Is It and Why It Matters - YouTube

Hi everyone. I'm Ara Oghoorian with ACap Advisors  and Accountants, and welcome to another edition of  

the ACap ReCap, where we go behind the blog and  answer some of your most important questions.  

Today we're going to talk about AB 150 (California  Assembly Bill 150). If you haven't heard about it  

it's California's response to the SALT limitation  (the state and local income tax limitation),  

that was a result of the Tax Cuts and Jobs Act of  2017. So, stay tuned! And we'll dive right into AB  

150. But in the meantime, please remember  to subscribe, like and share our channel,  

and if there's a subject matter, that you  want us to talk about, remember to include it  

in the comments below, or send us an email, and  we'll be happy to discuss it in a future video.

So, what is AB 150? AB 150 is a response  to the Tax Cuts and Jobs Act, that severely  

limited what is known as the SALT deduction  (the state and local income tax deduction).  

Prior to 2018, before the Tax Cuts and Jobs Act,  people in states like California and New York,  

high income tax states, were able to  take a deduction on the taxes they paid  

for their state local income taxes and their  property taxes. And because in those high tax  

states, they paid so much on property  taxes and state and local income taxes,  

that deduction on their tax return was relatively  large. But because the Tax Cuts and Jobs Act,  

they severely cut that limit to $10,000 per  year for individual. Now states like California,  

New York and other high tax states started looking  for alternatives and workarounds to circumvent  

that SALT limitation. AB 150 is California's  response to that SALT limitation of $10,000.  

Now I want to point out that AB 150 has a lot of  other provisions, but the only one that addresses  

the only area that addresses the SALT limitation  is the Small Business Relief Act, the other parts  

of AB 150 are an extension of sales tax exemption  for diapers and feminine hygiene products, another  

part of AB 150 is a tax credit on donations  of fresh fruits and vegetables to food banks,  

there's a small business hiring credit that's been  extended, and then there's an increase in the Cal  

Competes Credit. But today's presentation is only  going to be on the Small Business Relief Act,  

that directly addresses the SALT limitation from  the Tax Cuts and Jobs Act of 2017. So, now let's  

talk about what is the Small Business Relief Act?  The Small Business Relief Act is the heart of AB  

150, and it impacts the majority of California  residents especially pass-through entity business  

owners. So, under this Act pass-through entity  business owners are allowed to take an elective  

or pay an elective 9.3% tax on their net income,  then ultimately get a credit on their California  

tax return for that tax, that they paid. Now, what  this ultimately does is it reduces the net income  

on the federal level, that ultimately passes  down to the individual on their personal taxes,  

and then when they file their California  personal tax return, they claim a credit  

for that that payment they made. Now the payment  or the credit is a non-refundable credit, which  

we'll talk about later on, but it's important to  note that whatever amount they paid on that 9.3%,  

they're able to get it back through a credit  under California return. I should also point out  

that this provision of AB 150 the Small Business  Relief Act will be repealed if the Tax Cuts and  

Jobs Act is repealed: so if in two years Congress  makes a decision to repeal that SALT limitation,  

then obviously this 9.3% elected tax will also  be repealed. So, now the most important question  

is which entities qualify for this Small Business  Relief Act under AB 150, and to qualify you have  

to be a pass-through entity. So, the most  common ones are a partnership, that files  

a 1065 or an S corporation, and owners of these  pass-through entities can include individuals,  

trusts, estates and corporations. Now let's talk  about which entities do not qualify for the Small  

Business Relief Act of AB 150: corporations, such  as a C corporation, a publicly traded partnership,  

or an entity, that has a partnership as an owner.  So, for example if you have an S corporation or a  

partnership, and one of the owners or members is  a partnership, then that would disqualify you from  

qualifying for the AB 150 elective tax.  Unfortunately, also small business owners,  

who file Schedule C are not eligible. So, if you  are a Schedule C filer, you may want to consider  

incorporating as a S corporation to qualify for  this elected tax, now you have to run some numbers  

to see, if that makes sense for you, but as it  is as a Schedule C filer you would not qualify,  

but to qualify you have to be a pass-through  entity, such as an S corporation. The question on  

everybody's mind is, how do you actually calculate  the tax for AB 150 the Small Business Relief Act?  

We're going to have a very detailed example on  our website, so if you click on the link to go  

to our website and to our blog, we'll have a very  detailed example of actually how the calculation  

works. But for right now, we're going to do a very  broad overview of the calculation methodology.  

Assume we have a S corporation, a single member  S corporation in California, that corporation has  

to pay 1.5% tax on their net profit. Now, if  they elect to do this additional tax of 9.3%,  

it would be in addition to that 1.5% tax they  are paying. So, let's assume, that one member  

S corporation, single member or a sole owner has  a net profit of $350,000 for the year, if they  

pay the 1.5% tax in California, that comes out  to about $5,200 a year. Now, if they also elect  

to do the 9.3% tax, which will qualify for the  refundable credit, that would add another $32,000  

of taxes they'd have to pay. Now all that  would flow through on their personal K-1,  

and then on their California tax return  what they would do is they would claim a  

credit for that $32,000 approximately,  that they paid for that elective tax.  

If their tax liability is less than the credit  they're getting, because it's non-refundable,  

any difference would be carried forward up to  five years. So let's say, for example the credit  

they're going to get is $32,000 using the example  we gave, but the actual tax liability is $30,000,  

that additional $2,000 of credit they have can  be applied for a future year. Again, look at  

the example, that we have on our website, it will  clearly outline the pass-through amount that will  

show side-by-side comparison of an entity, that  is claiming the exemption or claiming the credit,  

and then an entity that is not claiming the the  tax. Once you've calculated the amount of tax  

owed, the next step is identifying when the actual  tax is due. Now for 2021 the tax is due on the tax  

filing deadline. Let's assume, that you are a  calendar year tax preparer, and we'll continue  

with the same example we had earlier at that  single member S corporation, if they're a calendar  

year tax filer, then the tax would be due on March  15, which is when an S corporation in California  

has to file their tax return and also for federal  as well. For 2022 the tax payment changes, it's  

going to be made in two different installments:  the first installment has to be made by June 15,  

and it has to be the greater of 50% of the tax  due or $1,000, the second payment is due on the  

tax filing deadline without extensions. Now that's  an important point, because this the way that the  

law is written AB 150, it does not allow you to  file an extension on your tax return to be able to  

claim this elective tax and the credit. What are  some of the key takeaways of AB 150 and the Small  

Business Relief Act? Well, not all shareholders  or partners have to consent to the election,  

that means that if you have a partnership with 100  partners, and 20 of them want to elect to it, and  

then the other 80 do not want to elect, that is  allowed under AB 150. So that's a really big plus.  

Also each shareholder and a partner has to  make the election annually, so they can do  

it one year and decide the following year they  don't want to do it, but the election has to  

be made every year. Also the election has to  be made on the original tax filing deadline,  

not including election not including extensions.  So, you can't extend the tax return, and then  

decide after the extension date of March 15,  assuming a calendar year a filer, that you want to  

claim the exemption or the the tax credit.  Also the election is irrevocable, so once,  

it's irrevocable for the year. So once you make  the election, you can't change and decide later  

you don't want to pay the tax until the  following year. Now let's talk about some  

of the downsides of AB 150. Unfortunately it  does not benefit individuals who are W-2 wage  

earners in California. So, if you're a W-2 wage  earner and you are limited by the SALT deduction,  

unfortunately you're not able to benefit from  this 9.3% elected tax. Also it only applies to  

pass-through entities. So, as I mentioned  earlier C corporations do not qualify, or  

publicly traded partnerships also do not qualify.  The way that it's written single-member LLCs, that  

are disregarded entities also do not qualify. So,  that's a big disadvantage, because there are many  

people in California, who are single member LLCs.  I also mentioned earlier that Schedule C filers  

would not be eligible for this election, because  the Schedule C filer is not a pass-through entity.  

So for those individuals they may want to consider  becoming an S corporation. One thing to keep in  

mind is that through this 9.3% elected tax it  essentially lowers your qualified business income  

deduction. If you don't know what that is, please  click on the link below and read our article on  

the qualified business income deduction.  Essentially that is a huge deduction that was  

part of the Tax Cuts and Jobs Act, and by taking  this election you're lowering your eligibility for  

the qualified business income deduction. So, keep  that in mind as you do your tax projections. Also  

another thing, that I think is going to get  contested and maybe repealed, is that it doesn't  

offset the California minimum tentative tax: what  that means is, let's assume that you make the  

election of 9.3% elected tax and then you pay the  tax, and the tax liability ends up being $30,000,  

but your California minimum tentative  tax is $60,000, the 60,000 will apply  

not the 30,000. Again, I think this is going to  get repealed, but the way that it's written now  

the California tentative minimum tax has not been  eliminated. Thank you very much for joining us  

for another edition of the ACap ReCap! I hope you  enjoy this video. Please remember to like, share  

and comment below. If there's a subject, that  you want us to address, please ensure to mention  

to the comment below, or send us a message, and  we'll be sure to include it in a future video.