What is CA AB150?
AB150 is a bill passed this year by CA, which allows pass-through entities (such as your S Corp) to elect to pay tax on the S Corp’s income on a business tax return. It was created in an effort to minimize the limitations of the $10K state tax cap on itemized deductions.
Will CA AB150 benefit me?
Unless you’re paying a ton of state taxes in other states and you are definitely filing a tax return where you’re itemizing your deductions on a Sch A instead of taking a standard deduction each year, this will almost certainly benefit you. Here’s why:
Paying this tax from your S Corporation will allow you to take a dollar for dollar credit against the taxes you owe to California at the individual level, so that part nets out to 0. You basically just move tax from one tax return to another for CA purposes!
Since your business is paying this tax, the net income of the business will decrease by the tax paid to California, which results in a lower taxable income flowing through to your individual tax return from your S Corporation (remember, you pick up 100% of your S Corp’s income that’s reported to the IRS, so reducing your S Corp’s income benefits you!).
Do I pay this AB150 PTE tax in addition to the estimated taxes I’m paying already?
You may still have some estimated tax payments to California outside of this, but any amount you pay to CA via AB150/PTE tax will reduce your CA individual tax payments dollar for dollar. We’ll make sure to account for this in future quarters if you choose to make this election!
As a heads up, you will indeed still need to pay your CA franchise tax fee each year (greater of 1.5% of income or $800), and you’ll also still need to make individual estimated tax payments to the IRS!
What’s the downside?
The biggest detractor here is just that the payment is due a bit earlier each year, since it’s paid alongside S Corp due dates vs. personal income tax due dates.
How do I elect?
To make your first year election in 2022, you’ll need to make a PTE tax payment to the CA FTB of $1,000 by June 15, 2022. Going forward, you’ll pay 50% of the prior year’s PTE tax by June 15 and any the rest by December 31, so that you can claim the deduction on your tax return.
Check out this article for instructions on how to pay!
What if I have a question about CA AB150 that isn’t covered in this article?
You can email [email protected] and we’ll make sure you get the info you need!