Gov. Newsom Proposes $4.5B for Equitable Recovery for CA Business and Jobs

California Governor Gavin Newsom recently announced the proposed state budget for 2021-22. He plans to expand several business tax credits, create a state and local tax (SALT) deduction cap workaround for pass-through entities and give cash payments to those who qualify for the earned income tax credit, as part of a larger recovery plan for the state’s economy.

Details

Governor Newsom proposes including $4.5 billion for equitable recovery for California’s businesses and jobs in the 2021-22 budget. The California Jobs Initiative portion of this, a $777.5 million proposal, aims to accomplish the following:

• Mitigate the federal $10,000 SALT deduction limitation for S-corporation shareholders by allowing the S-corporation to pay tax at a rate of 13.3%, thereby reducing the amount of income passed to shareholders and subject to federal income tax.
• Increase annual funding for the California Competes tax credit by increasing the budget from $180 million to $270 million in the current fiscal year and the next fiscal year and adding $250 million for a one-time grant program.
• Provide an additional $100 million for sales tax exclusions for manufacturers that promote alternative energy and advanced transportation.
• Extend the Main Street Small Business Tax Credit to encourage hiring new employees and rehiring former employees and allocate another $100 million to provide another round of credit reservations and expand eligibility to more employers.
• Provide additional funds to be available for the California Infrastructure and Economic Development Bank (IBank) Small Business Finance Center to provide small business loans and disaster loan guarantees ($50 million, which will be leveraged to provide $250 million in loans) and for the California Rebuilding Fund ($50 million).

Before the proposed changes are enacted, a number of steps need to occur.  First, the budget committee chairs in each house will introduce the governor’s budget proposal in bill form. The Legislative Analyst’s office will then conduct a detailed review of the budget bill and release various reports throughout January and February.

Between March and May, each house will refer their budget bill to their respective budget committees. After various hearings, each subcommittee will vote and send the reports to the full budget committee.

Between late May and June 15, the budget committee of each house will consider the subcommittees’ report and send a revised budget bill to the floor for evaluation by the full body. The state Senate and Assembly each vote on the final version before it is sent to the governor. By July 1, the governor will sign the bill and enact the budget to make it law.

Insights

There is still some time before these proposed items would be enacted, however, if enacted, these budget items could provide substantial benefits to businesses.  The pass-through entity tax election could save S-corporation shareholders significant federal tax if they are receiving a large portion of their income through an S-corporation, especially given that federal tax rates are likely to increase.

In addition, the various credits can help save taxpayers cash tax for their business operations.  Additional funds may also be available to taxpayers through a variety of loans.

We will keep you posted. If you have any questions on how your business may be affected by the proposed budget, contact our experts.