New regulations regarding financial reporting for American businesses operating both domestically and overseas will soon go into effect.
In 2021, Congress passed the Corporate Transparency Act (CTA), which is a piece of legislation aimed at monitoring potential money laundering and other illicit activities. Businesses subject to the CTA will be required to provide information to the Financial Crimes Enforcement Network (FinCEN), an arm of the Department of the Treasury. The CTA requires the filing of a “beneficial owner report,” which furnishes key information about each beneficial owner of the business: full legal name, date of birth, residential street address, and identifying numbers from legal documents (e.g., driver’s license or passport). Failure to furnish the information required by the CTA can result in hefty penalties and even imprisonment.
Recently, FinCEN issued proposed regulations that include the following details:
- The CTA will go into effect upon finalization of the FinCEN regulations, which is expected to occur sometime in 2022.
- The CTA reporting requirements will apply to the majority of small businesses, including corporations, limited liability companies (LLCs), limited partnerships, limited liability partnerships, limited liability limited partnerships, and business trusts. Sole proprietorships and general partnerships are not subject to the CTA, and companies with more than 20 full-time employees and $5 million in gross receipts are also exempt.
- A “beneficial owner” is someone who own 25% or more of the company and who exercises substantial control over the company, either directly or indirectly.
Our accounting advisors are working diligently to remain up to date on new developments regarding the CTA and FinCEN reporting requirements. You can be confident that we will keep you apprised of the situation. Please do not hesitate to reach out with any questions or concerns.
A qualified passthrough entity and its owners must make an annual election each year to pay California’s passthrough entity elective tax and receive the tax benefits that the elective tax provides. To preserve the right to make the election for the 2022 taxable year, the passthrough entity must make a prepayment of the tax by June 15, 2022. An entity that fails to make the required June 15, 2022, prepayment is prohibited from making the election for the 2022 taxable year.
For a quick refresher: California’s passthrough entity elective tax statute allows qualified S corporations, partnerships, or LLCs to pay tax on their individual, trust, estate, and certain single member LLC owners’ share of the entity’s qualified net income at the entity level. It also allows these owners to claim a credit for the tax paid on their California personal income tax return.
Having the entity pay the tax may reduce your federal taxable income by the amount of tax paid, and you may also qualify to claim a 100% California credit equal to the amount of the entity tax paid on your share of the entity’s income.
The amount of the June 15 prepayment is the greater of:
- 50% of the passthrough entity elective tax paid for the prior tax year; or
- $1,000 (if you did not make the election for 2021 and will not do so on an extended return, then only $1,000 has to be paid by June 15, 2022, if you want to make the election for 2022).
The 50% figure is nonnegotiable, even if we know the entity’s income for 2022 will be less than it was for 2021. There is also no reasonable cause exception for not meeting the 50% threshold. This is true even if your 2021 entity tax return is still on extension.
Because of this all-or-nothing rule, for returns still on extension we are advising clients to add a “cushion” to what we estimated the 2021 tax liability to be so you do not lose the right to make the election for 2022.
Entities make the payment by:
With the prepayment deadline fast approaching, it is critical to discuss whether making the election for 2022 is the right move for you and your passthrough entity this year. Please reach out to your Bowman & Company, LLP tax professional, so we can set up an appointment to evaluate your situation.
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.