California Tax Legislation: One Big Beautiful Bill Act

News Summary

California introduces the One Big Beautiful Bill Act (OBBBA), reshaping tax legislation for high-income business owners. Key features include extending the Qualified Business Income deduction, improved Qualified Small Business Stock incentives, and a revised SALT deduction limit. The bill also reinstates full bonus depreciation for asset purchases and increases estate tax exemptions. With strategic planning, business owners can leverage these provisions for significant tax savings.

California is undergoing a significant transformation in its tax legislation with the introduction of the One Big Beautiful Bill Act (OBBBA), which focuses on providing new tax benefits for high-income business owners. This comprehensive bill includes a package of seven tax planning strategies designed to reshape the financial landscape for entrepreneurs and business leaders across the state.

One of the key features of the OBBBA is the permanent extension of the Qualified Business Income (QBI) Deduction, which was set to expire in 2025. This deduction allows eligible business owners to reduce their taxable income, effectively lowering their overall tax burden. Under the new legislation, the income phase-out range for the QBI deduction has been raised, enabling more high-earning business owners to take advantage of this tax relief.

California, known for its high tax rates, presents unique challenges for business owners when it comes to tax planning. The QBI deduction is particularly valuable in such high-tax states, but it requires proactive tax strategies to maximize its benefits. The OBBBA aims to help business owners navigate these complexities effectively.

Further enhancing tax benefits, the OBBBA introduces improved incentives for founders, early-stage employees, and investors through the Qualified Small Business Stock (QSBS) provisions. Entrepreneurs who sell qualified small business stock can now do so tax-free, limited to the greater of $15 million or 10 times their original investment. This provision can lead to significant tax savings, potentially exceeding 37% when selling small business stock.

Additionally, the OBBBA raises the State and Local Tax (SALT) deduction limit to $40,000 by 2025, with provisions for indexing it for inflation. However, the SALT deduction begins to phase down once modified adjusted gross income exceeds $500,000, reverting to a $10,000 cap for incomes above $600,000. This adjustment reflects ongoing efforts to balance state revenues while accommodating the tax relief needs of high-income individuals.

The legislation also reinstates 100% bonus depreciation for business asset purchases, enabling businesses to claim full depreciation in the first year. For instance, if a business invests $200,000 in assets, it could lower its tax liability by approximately $74,000. Additionally, the OBBBA increases the Section 179 deduction limits to $2.5 million, with the phase-out threshold rising to $4 million.

Starting in 2026, the lifetime gift and estate tax exemption is set to increase to $15 million per individual, alongside inflation adjustments. This change provides more extensive estate planning opportunities for business owners, enabling them to pass on their wealth more effectively to their heirs.

Another strategic option included in the OBBBA involves Cash Balance Plans, which can significantly benefit business owners through substantial pre-tax contributions. By combining these plans with Profit-Sharing Plans, owners may be able to save more than $300,000 annually on their taxes.

The OBBBA is not only seen as a means for individual wealth building but is also viewed as a framework for investing in socially responsible causes. As such, strategic year-round tax planning with a qualified professional is strongly encouraged to fully leverage the opportunities presented by the OBBBA.

Furthermore, the bill establishes a June 15, 2025 deadline for electing the Pass-Through Entity Tax (PTET) provision in California. The PTET serves as a workaround for the SALT deduction cap, allowing non-deductible state taxes to be claimed as deductible business expenses. This is particularly important, as the previous tax reforms under the Trump administration limited SALT deductions to $10,000, significantly affecting high-income Californians. Through the PTET, eligible business owners can transform state income taxes into fully deductible business expenses.

In conclusion, the OBBBA emerges as a comprehensive approach to addressing the tax challenges faced by high-income business owners in California. Understanding and employing deferred tax strategies can yield considerable savings over time, making it essential for entrepreneurs to take full advantage of the provisions outlined in this legislation.

California’s One Big Beautiful Bill Act Transforms Tax Landscape

News Summary

Deeper Dive: News & Info About This Topic

Author: HERE LOS ANGELES