California Introduces Revolutionary Tax Bill for Business Owners

News Summary

California is set to introduce the ‘One Big Beautiful Bill Act’ (OBBBA), transforming the tax framework for high-income business owners. Key features include the permanent extension of the Qualified Business Income Deduction, enhanced benefits for Qualified Small Business Stock, increased SALT deduction limits, and the restoration of 100% bonus depreciation. These changes aim to ease tax burdens and encourage strategic investments, paving the way for substantial savings and fostering economic growth in the state.

California is set to revolutionize its tax framework for high-income business owners with the introduction of the “One Big Beautiful Bill Act” (OBBBA). This new legislation brings significant tax benefits and aims to alleviate some burdens for business leaders navigating a high-tax state. The OBBBA introduces seven key tax planning strategies intended to reshape financial landscapes for entrepreneurial individuals in California.

One of the most notable features of the OBBBA is the permanent extension of the Qualified Business Income (QBI) Deduction. Originally scheduled to expire in 2025, the extension allows more high-earning business owners to benefit from this deduction. Eligibility for the QBI deduction has been expanded by raising the income phase-out ranges, meaning that more California business leaders can now qualify for this tax relief. This deduction is particularly advantageous in states with high taxation, such as California, provided that proper tax strategies are employed.

Furthermore, the OBBBA enhances benefits through the Qualified Small Business Stock (QSBS) provisions. Entrepreneurs can sell qualified small business stock tax-free up to either $15 million or ten times their original investment, whichever is greater. This change could translate to a tax saving of over 37% for business owners upon selling their small business stock.

The OBBBA also significantly increases the State and Local Tax (SALT) deduction limit to $40,000 by 2025, with future adjustments for inflation. However, the deduction phases down for individuals with modified adjusted gross income exceeding $500,000, reverting to a $10,000 cap at income levels over $600,000. This measure addresses concerns raised since the Tax Cuts and Jobs Act, which imposed a $10,000 limit on SALT deductions, deeply affecting high-income Californians.

In an additional move to support business investment, the OBBBA restores 100% bonus depreciation for purchasing business assets, allowing business owners to fully depreciate such assets in the first year. For instance, if a business acquires $200,000 in assets, it could potentially decrease its tax liability by $74,000. The act also raises the Section 179 deduction limits to $2.5 million and increases the phase-out threshold to $4 million, further promoting business growth and expansion through strategic investments.

Starting in 2026, the lifetime gift and estate tax exemption will rise to $15 million per individual, with adjustments for inflation. This change aims to ease the tax burden on owners looking to pass on their wealth. Additionally, the OBBBA introduces changes to Cash Balance Plans, allowing business owners to contribute significantly to pre-tax accounts, potentially saving over $300,000 annually when used in conjunction with Profit-Sharing Plans.

Beyond immediate tax benefits, the OBBBA is seen as a framework for wealth building and encourages investments in socially responsible ventures. To maximize the advantages presented by the OBBBA, year-round strategic tax planning with a professional is crucial. Business owners must navigate the complexities of these new provisions effectively to realize the potential savings and benefits.

One crucial deadline associated with the OBBBA is the Pass-Through Entity Tax (PTET) provision, which must be elected by June 15, 2025. This provision serves as a workaround for the SALT deduction cap, converting non-deductible state taxes into deductible business expenses, a benefit particularly valuable to those impacted by the Trump tax plan.

Understanding and implementing deferred tax strategies under the OBBBA can lead to substantial savings over time for business owners. The introduction of these new provisions marks a significant shift in California’s approach to wealth management for high-income business proprietors, encouraging further economic growth and innovation in the state.

Deeper Dive: News & Info About This Topic

• Forbes: 7 Tax Strategies for High-Income California Business Owners
• Procopio: Tax Services
• SmartAsset: California Mansion Tax
• Sacramento Bee: California Tax News
• Kiplinger: GOP Tax Bill and California Cost of Living
• Wikipedia: Taxation in California