CA SALT Tax Workaround

Technical topics regarding tax preparation.
#1
CO CPA  
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I'm planning on implementing this new strategy for my CA clients. If I'm understanding this correctly, we'll pay 9.5% of net income on the 2021 return due 3/15/22. So I'm in the clear to stop all estimated tax payments for CA at the individual level for the rest of the year, correct?

https://www.cohnreznick.com/insights/sa ... california
 

#2
sjrcpa  
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Not if the clients have other CA taxable income.
 

#3
Wiles  
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From that article:
For tax years beginning between Jan. 1, 2021, and Jan. 1, 2022, the elective tax is due and payable on or before the due date of the tax return without regard to any extension of time to file. For calendar year filers, the due date is March 15, 2022.


Hmm...
 

#4
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Wiles wrote:From that article:
For tax years beginning between Jan. 1, 2021, and Jan. 1, 2022, the elective tax is due and payable on or before the due date of the tax return without regard to any extension of time to file. For calendar year filers, the due date is March 15, 2022.


Hmm...


Yes, that's what I'm getting at. They have no other significant CA income other than their pship income. So am I correct that I can stop the estimated tax payments at the individual level and simply remit the 9.5% at the pship level by March 15th? I think so but want to make sure I'm not missing anything here because it's not small dollars.
 

#5
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Need to pay PTE by 12-31-21 to get 2021 deduction see IRA notice 20-75
 

#6
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TAXMASTER wrote:Need to pay PTE by 12-31-21 to get 2021 deduction see IRA notice 20-75

THANK YOU!! I don't know why this didn't dawn on me...considering cash basis...
 

#7
Keyad22  
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TAXMASTER wrote:Need to pay PTE by 12-31-21 to get 2021 deduction see IRA notice 20-75


My client asked me to do the tax forcast for them every month stating from August to estimate the entity income and PTE.

I just finished one based on January to July PnL. It is cool to have some small consulting income for our firm.
 

#8
JAD  
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Good point re cash basis and the timing of the deduction, but don't forget to consider the impact of potential rate increases.
 

#9
JAD  
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I am having trouble understanding how some provisions will work. Let's say S corporation with one shareholder.

Part 10.4 discusses this law from the entity's perspective. The entity may pay an elective tax at 9.3%. That is a federal deduction, and the shareholder's benefit is the federal deduction of the state payment and the credit on his individual state return.

The carryover provisions, if the entity pays more than 9.3% of its qualified net income, are in 17052.10, which is in the personal income tax section of the R&TC. The individual may carry the credit forward if the credit exceeds the "net tax".

What happens on the entity's side?

For example, let's say that the entity makes a payment of $9,300 in 2021 so that the shareholder will have the benefit of the tax deduction in 2021.

It turns out that qualified net income was only $80,000. The payment only should have been $7,440.

I think the individual has a credit carryover of $9,300 - $7,440 = $1,860.

I think the s corporation is limited to a deduction of only $7,440, so the federal net income allocated to the shareholder is $80,000 - $7,440 = $72,560. I don't think the calculation is $80,000 - $9,300 = $70,700.

What happens to that $1,860 difference on the S corporation's side?
 

#10
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I think the s corporation is limited to a deduction of only $7,440, so the federal net income allocated to the shareholder is $80,000 - $7,440 = $72,560. I don't think the calculation is $80,000 - $9,300 = $70,700.


AB 150 allows a qualifying business to elect to pay 9.3% of its net qualifying income under 10.4 ( so called PTE). Feds allow a deduction equal to the PTE.( see below).

So in your example $80,000 is the net income for which the 9.3% PTE is calculated on($7440). The credit will be equal to the PTE ($7440). The carryforward is the credit less the net 540 tax not what was paid to the entity. I would see the over paid PTE($1860) in your example as a refund from the 100-S. IRS and FTB regs please.

Notice 2020-75 "2) Deductibility of Specified Income Tax Payments. If a partnership or an S corporation makes a Specified Income Tax Payment during a taxable year, the partnership or S corporation is allowed a deduction for the Specified Income Tax
Payment in computing its taxable income for the taxable year in which the payment is made
 

#11
Wiles  
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In that case just over estimate and over pay the CA tax by 12/31. Reconcile it later and apply the excess towards the 2022 tax.
 

#12
Wiles  
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The 2021 credit must be paid by 3/15/22.

For 2022, the taxpayer must pay 50% of the 2021 credit amount by 6/15/22. Otherwise, no election is allowed for 2022.

If we overpay the 2021 amount, can we elect to apply that towards the 2022 amount? For some of my clients, I will want them to send CA a truck load of money so that they will be perpetually electing into this provision.
 

#13
JAD  
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What is the benefit of overpaying? The federal deduction is limited to 9.3% x qualified net income, right?
 

#14
Wiles  
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One, to make sure we paid enough in by 12/31/21 to claim the full 9.3% deduction for 2021.
Two, to make sure we have enough paid in by 6/15/22 to get the full credit for the 2022 year.
 

#15
Wiles  
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TAXMASTER wrote:Need to pay PTE by 12-31-21 to get 2021 deduction see IRS notice 20-75

Thank you for the cite.
Deductibility of Specified Income Tax Payments. If a partnership or an
S corporation makes a Specified Income Tax Payment during a taxable year, the
partnership or S corporation is allowed a deduction for the Specified Income Tax
Payment in computing its taxable income for the taxable year in which the payment is
made.

Want to make sure I read it correctly. The 12/31 cut off is also true for accrual basis PTEs. Correct?
 


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