Pass-Through Entity Elective Tax September 2021 Tax News

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Governor Newsom signed California Assembly Bill 150 into law on July 16, 2021. This new law allows certain pass-through entities to annually elect to pay an elective tax in the amount of 9.3% of the pro rata share or distributive share of the entity's partners, shareholders, or members. The partners, shareholders and members then receive a tax credit equal to that amount. The law is effective for taxable years beginning on or after January 1, 2021, and before January 1, 2026.

The pass-through entities that can elect to pay this tax are S corporations, general partnerships, limited liability companies taxed as partnerships, limited liability partnerships or limited partnerships. To qualify to make this election, the pass-through entity's owners must consist solely of individuals, fiduciaries, trusts, estates or entities taxable as corporations. The pass-through entity cannot have a partnership as an owner, cannot be a publicly traded partnership, and the pass-through entity cannot be permitted or required to be in a combined reporting group.

The pass-through entity will pay tax at a rate of 9.3% on the total of each consenting owner’s pro-rata or distributive share of income subject to California personal income tax (beginning at RTC section 17001). The election to pay the tax must be made on the entity's original, timely-filed return and is irrevocable for the taxable year.

Partners, members and shareholders who consented to the pass-through entity making the election are allowed a credit equal to 9.3% of tax paid on their pro-rata or distributive share of the entity's income. If the credit exceeds the tax due, any unused credit maybe carried forward for 5 years or until exhausted. A partner, shareholder or member that does not consent does not disqualify the entity from making the election to pay the tax, however all partners, shareholders, and members of the entity are bound by the entity's election.

For taxable years beginning on or after January 1, 2021, and before January 1, 2022, the tax must be paid on or before the due date of the original return of the electing pass-through entity, without regard to any extension of time for filing a return for the taxable year of election.

For each taxable year beginning on or after January 1, 2022, and before January 1, 2026 the pass-through entity must pay on or before June 15th of the taxable year of the election, the greater of:

  • 50% of the elective tax paid the previous year or
  • $1,000.

On or before the original due date of the tax return, the pass-through entity is required to pay the elective tax due less the amount paid on or before June 15th of the taxable year of the election. For the election to be valid, the pass-through entity must make timely payment.

The Franchise Tax Board is developing forms for entities to elect and pay the tax, and for partners, shareholders, and members to claim the tax credit.