On February 9th, Governor Newsom enacted two major pieces of new legislation. Senate Bill 113 delivers $6.1 billion of relief funds to small businesses suffering from the pandemic. Senate Bill 114 address COVID-19 paid sick leave.

The significance of the passthrough entity tax credit is a substantial one for small business owners, as it effectively permits many business owners to deduct the state income tax on their business income above the $10,000 state tax deduction threshold that has been applied for the past few years.

Senate Bill 113

This legislation provides aid to small businesses in the form of tax credits, specifically by expanding passthrough entity elective tax benefits. The majority of the items in the bill apply to the 2021 tax year. SB 113 makes the following changes:

  • Repeals the tentative minimum tax limitation on the Passthrough Entity Elective Tax Credit (PEET)
  • Allows single member LLCs (SMLLCs) that are passthrough entity owners to claim the PEET
  • Rescinds the NOL suspension for higher income taxpayers for the 2022 taxable year
  • Revokes the $5 million business credit limitation for the 2022 taxable year

In addition to the key items above, SB 113 allows partnerships, S corporations, and LLCs with owners that are partnerships make the PEET election and changes PEET credit ordering rules to increase the benefit for taxpayers that claim the Other State Tax Credit. The bill is in full conformance with the federal exclusions of Restaurant Revitalization grants (retroactive to the 2020 tax year) and is in partial conformance to the federal exclusion of Shuttered Venue Operator Grants (retroactive to the 2019 tax year).

Senate Bill 114

This bill impacts employers with more than 25 employees. It requires that they provide up to 80 hours—that is two standard working weeks—of COVID-19-related supplemental paid sick and family leave. The legislation is retroactive to January 1, 2022, and extends through September of 2022. SB 114 does not include any provisions regarding tax benefits or credits for employers who provide this supplemental paid leave.

If you have any questions or concerns regarding these new pieces of legislation, please do not hesitate to reach out to your Bowman & Company, LLP tax professional.