On June 27, California Gov. Gavin Newsom signed a balanced 2025 state budget (S.B. 101) into law, along with several trailer bills, including S.B. 132, which requires financial institutions to use California’s mandatory single sales factor apportionment formula beginning January 1, 2025. S.B. 132 also extends the elective pass-through entity tax (PTET) through the 2030 tax year.
S.B. 132 includes several other tax changes, including an increase in the cap of the California film and television tax credit and exclusions from income of wildfire settlements paid and of some military retirement and survivor benefits, as introduced in Newsom’s January budget proposal.
Single Sales Factor for Financial Institutions
For tax years beginning before January 1, 2025, an apportioning trade or business that derives more than 50 percent of its gross business receipts from conducting at least one qualified business activity must apportion its business income in accordance with a specified three-factor apportionment formula. S.B. 132 removes savings and loan activity and banking or financial business activity from the definition of qualified business activities for apportionment purposes. Accordingly, for tax years beginning on or after January 1, 2025, businesses classified as savings and loan or banking or financial businesses must now use a single sales factor formula for apportionment purposes.
Extension of the Pass-Through Entity Tax
Under prior law, the PTET and related credit against personal income tax to a taxpayer were set to expire at the end of the 2025 tax year. S.B. 132 allows the credit in a qualified taxpayer’s 2026 tax year and extends the operation of both the credit and the PTET through the 2030 tax year. Further, beginning with the 2026 tax year, the bill removes the requirement that the electing entity make a payment of a specified amount on or before June 15 of the year of the PTET election. However, if the electing entity does not make a payment by June 15 or makes a payment that is less than the required amount, the bill requires a reduction of the taxpayer’s credit against personal income tax.
BDO Insights
- California-based financial institutions might benefit from the change to a single sales factor. However, out-of-state businesses that fall into the banking or financial business or savings and loan classification for California franchise tax purposes could face increased California tax liabilities.
Also, California is amending its market-based sourcing regulations, which, together with the change to a single sales factor, might have an even more unfavorable tax result, such as for asset managers. - With the federal state and local tax cap no longer set to expire, California’s extension of the PTET and removal of the requirement to make the June 15 payment provides taxpayers with flexibility, at least as those changes relate to the California PTET. However, for tax years beginning on or after January 1, 2026, and before January 1, 2031, an electing entity that does not make the June 15 payment or makes a payment that is less than the required amount should take care when computing the reduced credit allowed to a qualified taxpayer as required under S.B. 132 and consult with their tax advisors.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.