California is poised to restore corporate tax breaks and extend the state’s workaround for the federal cap on deductions for state and local taxes.
Lawmakers finished fast action on the measure Monday and sent it to Gov. Gavin Newsom for his signature, delivering on his call for adjustments to the budget when the state is flush with a $45.7 billion surplus. Efforts in Congress to ease the SALT limit collapsed last year.
The bill (
The measure restores corporate net operating loss deductions and lifts a $5 million annual cap on business tax credit claims as of Jan. 1, 2022, one year earlier than planned. Lawmakers enacted the limits for three years in June 2020, when they were expecting a large drop in revenue due to the pandemic.
Instead, limitations would apply only to the 2020 and 2021 tax years. Reversing the limitations one year early will reduce state revenue by $5.5 billion.
“We find ourselves blessed with the resources to make the smart investments we need to rebuild California and set our economy on a robust path to recovery,” Assemblymember Cottie Petrie-Norris (D) said before the Assembly vote.
Expansion of the workaround for the federal $10,000 cap on personal state and local tax deductions will be in place in time for the March 15, 2022, tax filing payment deadline for pass-through business entities electing to use the option for the 2021 tax year.
The SALT cap workaround was enacted in 2021 allowing entities taxed as S corporations or partnerships to elect to pay a 9.3% state income tax, and their owners to claim a credit on their personal income taxes equal to the tax the entities pay.
Under the expansion, taxpayers can use the credit to offset the state’s tentative minimum tax. Also, pass-through entities that have partnerships as one of their owners and taxpayers that own a share of the business through a disregarded entity such as a single-member limited liability company could use the election.
The bill also conforms California to federal tax treatment of grants under the Restaurant Revitalization Fund and Shuttered Venue Operators Grant program, exempting the grants from state tax and allowing deductions for related expenses.
It also exempts payments that water, wastewater, gas and electric utility customers received to pay their bills under pandemic relief programs from state tax.
