Governor Signs Two Significant Bills Affecting Businesses

At a glance 

• Main takeaway: Earlier this week, Governor Newsom signed two significant bills that business should understand, SB 113 and SB 114.
• Impact on your business: SB 113 may have significant positive impact on your business finances, while SB 114 may positively impact some personal finances while adding a cost to your business.
• Next steps: Contact Aprio’s Business Tax Team to explore more information about how your business may be impacted by these bills. 

Schedule a consultation with Aprio today

The full story: 

Earlier this week, Governor Newsom signed two significant bills that business should understand, SB 113 and SB 114.

SB 113 may have significant positive impact on your business finances, while SB 114 may positively impact some personal finances while adding a cost to your business.

SB 113 economic relief

SB 113 includes business tax law changes that that were part of the Governor’s 2022-23 budget proposal, and they generally benefit businesses and their owners. The new law’s scope is somewhat technical, therefore please contact your Aprio tax professional if you would like additional information.

Following is a summary of some of the key changes.

PTE tax benefits

SB 113 modifies the state’s passthrough entity elective (PTE) tax benefits. This is the 2021 law, which allowed some taxpayers to skirt the Federal limitations on the deductions of State and Local Taxes (SALT). 

SB 113 changes the rules by withdrawing the tentative minimum tax limitation on the PTE Tax Credit and by removing a provision that prohibits the credit for PTE tax paid by reducing tax owed below a taxpayer’s tentative minimum tax, effective for tax years beginning on or after January 1, 2021.

Further, it amends the definition of “qualified entity” to include a partnership as an eligible partner, shareholder, or member and requires the elective tax credit to be applied against the net tax after credits for taxes paid to other states, effective for tax years beginning on or after January 1, 2022.

It allows a business owned by individuals using a limited liability company that is disregarded for federal income tax purposes and meets certain conditions to elect the PTE tax and credit and includes guaranteed payments made to partners in the entity’s qualified net income for purposes of computing the tax. Except as noted, these changes will apply to the 2021 tax year. 

NOLs and tax credits

The new law shortens the previously enacted suspension on the use of net operating losses (NOLs) and prior limits on the use of business tax credits, including the research and development (R&D) credit.
 
Previously, the NOL suspension applied to California taxpayers with net business income of $1 million or more and the amount of business tax credits that could be used in a year was limited to $5 million for the tax years 2020, 2021 and 2022.
 
SB 113 restores NOLs and removes the limit on business tax credits for the 2022 tax year.
 
In addition to the R&D credit, other credits for which the limit has been removed include the jobs tax credit, the California competes credit, motion picture production credits (including the motion picture production credits as applied to California sales and use tax), and insurance tax credits.

RRF and SVOG tax treatment

SB 113 also conforms California’s income tax treatment of payments from the federal Restaurant Revitalization Fund (RRF) and grants from the federal Shuttered Venue Operators Grant (SVOG) program to the federal income tax treatment of these payments.
 
As a result, these payments are excluded from gross income and taxpayers may deduct business expenses paid with these funds (except for taxpayers that are “ineligible entities”).
 
Finally, SB 113 provides $150 million in funding for remaining eligible waitlisted applicants for the California Small Business COVID-19 Relief Grant Program.

SB 114 Employment

The Governor also signed SB 114, which requires employers with more than 25 employees to provide up to 80 hours of COVID-19–related paid supplemental sick and family leave, retroactive to January 1, 2022, through September 30, 2022.
 
There are no provisions that provide tax benefits or credits to employers who provide the supplemental paid leave.
 
Schedule a consultation with Aprio today to learn more about how these changes may impact your business.