Pass-through entity (PTE) elective tax - don’t snooze through 06/15/22!
Do you own a qualifying pass-through entity (PTE) in California, such as a business taxed as an S corporation or partnership?
If so, double-check with your CPA or other tax preparer pronto about whether to make an estimated elective tax payment (due by 06/15/22) in order to take advantage of this California personal income tax reduction strategy for business owners.
For tax years beginning on or after January 1, 2021 and before January 1, 2026, qualifying pass-throughs are able to elect each year to have the entity pay the state tax due on their share of the entity’s pass-through net income.
Qualifying taxpayers then receive a tax credit on their California state income tax return, reducing the amount of California personal income tax owed.
In essence, this is a “workaround” to help soften the blow of the unwelcome $10,000 State & Local Tax (SALT) deduction cap. While nearly 20 states have now enacted similar work-arounds for their pass-through, here are some details for California business owners...
According to the Franchise Tax Board (FTB):
“a qualifying PTE is an entity taxed as a partnership or S corporation”
“a qualified taxpayer is a partner, member, or shareholder of an electing qualified entity”… or “a disregarded single member LLC… subject to California personal income tax”
the amount of “elective tax is 9.3% of the entity’s qualified net income”
“qualified taxpayers are eligible to claim a nonrefundable credit for the amount of tax paid”
“qualified taxpayers can claim the credit on their personal income tax return”
“unused credits can be carried over for up to 5 years”...
The key to getting this done is to make sure you make the correct estimated tax payment to the FTB by 06/15/2022 (for the 2022 tax year). Failure to do that will shut you out for 2022!
**Per the FTB: “For taxable years beginning on or after January 1, 2022, and before January 1, 2026, the PTE may not make an election if the initial payment is not made by June 15.”
In other words, for the 2022 taxable year, by 06/15/2022 Payment 1 must be made to the FTB . That estimated payment is the greater of $1,000 or 50% of the elective tax paid in the prior taxable year. If you made no PTE payment for the 2021 tax year, then this amount should simply be $1,000.
Payment 2, the remaining amount owed, is then made on or before the due date of the original entity tax return without regard to extensions, and with the PTET election made on a timely-filed tax return.
So how do you make the estimated payment? Once you’ve personally confirmed all of this with your tax preparer, and double-checked the correct minimum amount to pay for Payment 1, you can pay electronically using the FTB’s Web Pay.
Just click through and select Bank account, then Use Web Pay Business, select your entity type and enter your entity ID, then select the radio button for Pass-Through Entity Elective Tax (Form 3893).
For more information on the PTE, visit the State of California Franchise Tax Board at: https://www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/index.html
SALT tax work-around!
Disclaimer: Clients should note that The Wealth Collective will not provide accounting or legal advice, nor prepare any accounting or legal documents. Clients are urged to work closely with their attorney and/or accountant in implementing our recommendations. However, at the client’s request we may recommend the services of a third-party attorney, accountant, tax professional or other specialist. The Wealth Collective is not compensated for these referrals.
