On July 16, 2021, California Governor Gavin Newsom signed “Assembly Bill 150” into law to join a number of states that have an optional passthrough entity tax (“PTE Tax”) regime. The bill allows a qualified entity to make an annual PTE tax election for the taxable years beginning January 1, 2021, and before January 1, 2026. This is an entity-level tax to work around the current $10,000 cap on State and Local tax under individuals’ itemized deduction.
The following summarizes key information regarding California’s Pass-Through Entity (PTE) Elective Tax.
Taxable years beginning on or after January 1, 2021, and before January 1, 2026.
Who is Eligible:
• Qualified Entity
Any partnerships, Federal S corporations other than PTEs that are permitted or required to be included in a combined reporting group, publicly traded partnerships or a PTE that has a partnership as a partner or member.
• Qualified Taxpayers (Partners, Members, and Shareholders of Qualified Entity)
The qualified partners, members, and shareholders of a qualified entity are individuals, fiduciaries, estates, or trusts subject to California personal income tax and cannot be a disregarded business entity, a corporation, or a partnership.
The qualified partners, members, and shareholders have the option to participate in the PTE election opportunity. Non-consenting PTE owners don’t prevent the entity from making the election for consenting PTE owners.
Once the election is made, it is irrevocable for the tax year. For the 2021 taxable year the election must be made on a timely filed tax return and the PTE tax must be paid on or before the due date. For the taxable years beginning on January 1, 2022, and before January 1, 2026, the annual election must be made when the tax return for the taxable year is filed and the PTE must make an initial payment by June 15 (Note: the PTE may not make an election if initial payment is not made by June 15).
Pro rata or distributive share of each consenting PTE owner’s income subject to California personal income tax.
When to Pay the Elective Tax for Taxable Years 2022 to 2025:
|On or before June 15th of the taxable year of the election.||Pay $1,000 or 50% of the elective tax paid in the prior taxable year, whichever is greater.|
|On or before the original return without regard to extensions.||Pay the remaining amount.|
A partner or member of an electing qualified entity that is disregarded for federal income tax purposes is not eligible to have the PTE pay the tax on its behalf. California allows for the consenting PTE owner to claim the credit on their California income tax returns based on the owners’ pro-rata or distributive share of income. The credit is non-refundable, and the excess credit can be carried forward up to five proceeding years.
The following tax forms are being developed for qualified entities to make the PTE elective tax payments or for qualified taxpayers to claim the tax credit:
• Pass-Through Entity Elective Tax Payment Voucher (FTB 3893) – available November 01, 2021
• Pass-Through Entity Elective Tax Calculation (FTB 3804) – available January 2022
• Pass-Through Entity Elective Tax Credit (FTB 3804-CR) – available January 2022
Additional Information That May Help Decision Making:
• If you own a single member LLC or sole proprietorship, you are not eligible for the PTE tax. However, you can do tax planning to change your business to be taxed as a partnership or elect to be taxed as an S corporation so that your business may be qualified for the PTE tax.
• If you are in the CA tax bracket lower than 9.3% tax rate and you don’t have any significant CA income other than pass-through from qualified PTE, you may lose the PTE tax credit carryover after 5 years. Therefore, careful annual evaluation and planning are recommended.
• Being that the “SALT CAP” could possibly be repealed altogether and President Joe Biden’s tax proposal of a 28% cap on itemized deductions for individuals earning more than $400,000 annually needs to be monitored for future development.
Please contact us if you have any questions or want to consider making the required election.
The Partners and Staff