SALT and PTE Update

Earlier this year, Gov. Gavin Newsom made it a priority to fix the problems associated with the new federal limits posed on individual state and local tax (SALT) deductions resulting from the passage of the Tax Cuts & Jobs Act of 2017 (TCJA). After it took effect, the TCJA limited the amount of SALT deductions an individual could deduct on their federal income tax return to $10,000. This excessive limitation disproportionately affected taxpayers in high cost-of-living states like California, where taxpayers are far more likely to exceed the current SALT cap. For many small-business owners, this effectively increased their overall tax liability and exacerbated an already challenging economic climate made direr with the COVID pandemic.

Addressing this issue legislatively through the state budget, the governor’s administration has proposed a framework that would allow individual owners of pass-through entities (PTE) to shift some of their tax liability to the entity level, making it deductible for federal tax purposes. This approach would be revenue neutral to California because it allows eligible taxpayers to reduce their federal tax liability without affecting their state tax liability; therefore, California will maintain the same level of state collections.

In the coming days, CalCPA will continue to review the proposed language and work with the Department of Finance and legislative leaders to ensure that any issues raised by the profession are addressed as this proposal moves through the legislative process. You can read a letter CalCPA sent to legislators June 2 on this topic online.