In this episode of Practical Tax, tax attorneys Steve Moskowitz and Cliff Capdevielle discuss the recent passing of Senate Bill 113 (SB113) in California and how it can affect your annual tax payments.
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You’re listening to the Practical Tax podcast with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz LLP, a tax law firm.
Welcome, everyone. We have good news followed by some more good news.
July 16th, 2021, California passed AB150 that is going to save you some federal taxes on the state taxes that you pay. And just this month, it was modified in SB113 to make it even better. So here’s the deal. When the Tax Cuts and Jobs Act came along, it took away our ability to deduct state income taxes on our federal return in excess of $10,000. And that really hurt in high-tax states like California.
So what California did, and this was just been approved by the IRS, so you don’t have to worry there’s going to be a conflict there, that you can make an election. And again, it’s not for everybody, but for those it’ll benefit, and there’s going to be significant benefits here, you can make an election to pay your state taxes at the entity level, like an S Corp, LLC, that would normally just pass these things through. At the entity level, you reduce the amount of your profit on the K-1 and therefore pay less federal taxes. So effectively, it’s almost like going back to when you could deduct the state taxes on the federal return.
Again, the reason for this is doing it this way, it’s going to reduce the profit of the entity on the K-1, so the amount that’s going to be on your federal tax return from your entity is going to be less the state taxes. You pay less federal taxes. And again, the IRS has approved this. Cliff, you want to tell us some more about this?
Yeah, so this is big news for owners of S Corporations and LLCs and partnerships. The new law allows you to make an election and compute your entity level tax. For California, it’s 9.3% and a flat rate. And that will pass through to the individual owners on their K-1s. And obviously this gets around that 2017 law which limited the state tax deduction to $10,000.
Thank you, California.
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