(disclaimer: this is not legal advice consult with a licensed professional)
Summary: Starting on or after January 1, 2021, and before January 1, 2026, some entities may be eligible to annually elect to pay personal state income tax through at the entity level. The entities must be a qualifying pass-through entity known as PTEs. Qualifying taxpayers will receive a credit for what they paid at the entity level which will reduce their California personal income tax.
Taxpayers must make the PTE election on an original timely filed tax return. Once the election has been made, it is binding on all partners, shareholders, and members in the PTE and is in effect for that year.
Entities that are tax as Partnerships or S-Corporations
Who doesn’t qualify?
The goal of the PTE is to help taxpayers, not necessarily big corporations so there is a cap on what types of companies qualify. PTE Doesn’t include:
- Publicly traded partnerships
- Entities that are permitted or required to be in a combined reporting group
- Entities that have partnerships as partners, members or shareholders
What or who is a qualified taxpayer (QTP)?
- Can be individuals, fiduciaries, estates, or trusts subject to California personal income tax
- Must be a partner, member, or shareholder of an electing qualified entity
A taxpayer must consent to have their pro rata or distributive share of the qualified net income of the electing qualified PTE to be qualified.
What or who isn't a qualified taxpayer?
- Disregarded business entity and its partners and members
How does it all work?
- The taxpayer must make a PTE election on timely filed return
- The PTE must pay the elective tax on the specified dates mentioned by the FTB
- 2021 - on or before the due date of original return
- On or before June 15 of the taxable year (please read the rules for payment info)
- On or before the due date of the original return without regard to extensions (please read the rules for payment info)
- The PTE elective tax calculation is 9.3% of the entities qualified net income (sum of the pro rata or distributive share of each qualified taxpayers' income subject to California personal income tax.)
- Qualified taxpayers are eligible to claim a nonrefundable credit (to claim a nonrefundable credit for the amount of tax paid on the qualified taxpayers’ pro rata or distributive share of the qualified entity’s qualified net income. Unused credits can be carried over for up to 5 years.)
- Finally, the QTP can claim their credit on their personal income tax return and close the cycle.
California is still in the process of creating the forms that are associated with the election. Stay tuned for updates. (Elective Tax Payment Voucher FTB 3893, PTE Elective Tax Calculation FTB 3804, PTE elective tax cFTB 3804-CR)