With the newly elected legislature sworn in last month, two highly controversial bills from the previously legislature – A.B. 1253, which would have increased the highest individual tax rate to 16.8%, and A.B. 2088, which would have created an annual wealth tax of 0.4% for certain taxpayers – have officially died. However, the current legislature is considering a number of tax bills this session.
Assembly Bill 71
Perhaps the most controversial bill being considered is A.B. 71, which proposes a number of tax increases designed to raise $2.4 billion in revenues to combat homelessness within the state. The bill would increase the corporate tax rate from 8.84% to 9.6% for non-financial institution (10.84% to 11.6% for financial institutions) with taxable income in excess of $5 million. The legislation suggests that the increase in tax would be on the entire amount of taxable income and not an increase in the marginal rate of income in excess of $5 million. Furthermore, in the case of taxpayers operating in multiple states, the legislation does not address whether the increased tax rate would apply if the taxpayer’s total income from all sources is in excess of $5 million or if it would only apply if the taxpayer’s California sourced income is in excess of $5 million. For tax years beginning January 1, 2022, A.B. 71 would also require individual taxpayers with interests in controlled foreign corporations to include 100% of global intangible low taxed income (GILTI) in the taxpayer’s gross income. Corporate taxpayers that have not made a water’s edge election would be required to include 50% of GILTI income within their taxable income as well as 40% of any repatriated income under IRC § 965.
The original bill also included provisions that would increase personal income taxes on incomes over $1 million as well as marking to market unrealized capital gains and repealing the step up in basis of inherited assets. However, these provisions have been deleted from the current version of the bill.
Assembly Bill 91
For tax years beginning on or after January 1, 2021, Assembly Bill 91 would reduce the $800 minimum tax imposed on corporations, limited partnerships, limited liability partnerships, and limited liability companies to $400 for a “small business” and to $200 for a “micro business.”
An entity qualifies as a “small business” if it is: (1) independently owned and operated that is not dominant in its field of operation, (2) the principal office is located in California, (3) the officers are domiciled in California, (4) has 100 or fewer employees, and (5) average annual gross receipts of $15 million or less over the previous three years. The $15 million average annual gross receipts requirement does not apply if the entity is classified as a manufacturer.
A “micro business” is a type of “small business” that has average annual gross receipts of less than $5 million or is a manufacturer with 25 or fewer employees.
Assembly Bill 62
For tax years beginning on or after January 1, 2021, Assembly Bill 62 would allow a credit against the corporation income tax or personal income tax for expenditures paid or incurred during a taxable year incurred by a “small business” (as defined above) or an employer that employs a workforce identified by the State Public Health Officer on the list of Essential Critical Infrastructure Workers for amounts paid or incurred to comply with regulations adopted by the Occupational Safety and Health Standards Board relating to COVID-19 prevention.
Senate Bill 104
Senate Bill 104 has been introduced as a work around to the $10,000 cap on the deductibility of state and local taxes. Federal law prohibits individuals from deducting state taxes in excess of $10,000 (“the SALT cap”) on their federal tax returns. Senate Bill 104 would allow certain pass-through entities (e.g. limited partnerships, limited liability partnerships, limited liability companies, and S corporations) to make an annual election to pay tax at a rate based on its net income for the preceding year. When such an election is made, the individual partner, member, or shareholder would exclude from his or her gross income any income received from the pass-through entity making the election. Thus, the tax is paid at the entity level and the entity is entitled to take a business expense for the tax paid at the entity level, thereby reducing the amount of income reported on the individual’s federal tax return. Thus, the individual indirectly obtains the benefit for the state deduction that would otherwise be disallowed on his or her individual return. If enacted, this election would apply for tax years occurring on or after January 1, 2021 and before January 1, 2016, which is when the SALT cap is set to expire for federal tax purposes.
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