Help with pass-through entity elective tax Frequently asked questions
PTE election and qualifications
Only qualified entities may make a Pass-Through Entity (PTE) election to pay the entity-level elective tax.
A qualified entity must make the election on its original, timely filed return.
For more information, visit PTE election.
Yes, as long as the general partnership also meets the qualifications for the PTE election. For more information, refer to qualified entities.
Yes, an entity can be a "qualified entity" even if it has a disregarded entity as a partner, member, or shareholder. The entity must still meet all of the requirements for the PTE election, but having a disregarded entity as a partner, member, or shareholder will not prevent the entity from being a "qualified entity".
A disregarded entity alone cannot be a qualified entity because it is not taxed as a partnership or S corporation.
Generally, no, a disregarded business entity and its owners cannot receive the PTE credit because it is not considered a qualified taxpayer. However, a disregarded single member LLC that is owned by an individual, fiduciary, estate, or trust subject to California personal income tax and that is a partner, shareholder, or member of an electing qualified entity can receive the credit.
Yes, a trust that is included in the definition of “taxpayer” under Revenue and Taxation Code section 17004 is a qualified taxpayer and is eligible for the PTE credit.
Yes, but the SMLLC is not a qualified taxpayer since it is not owned by an individual, fiduciary, estate, or trust.
What is included in the qualified entity's qualified net income
Qualified net income is the sum of the pro rata share or distributive share of income and guaranteed payments subject to California personal income tax of each consenting partner, member, or shareholder.
A qualified entity's election to pay the PTE elective tax is binding on all of its partners, members, or shareholders.
Only consenting partners', members', or shareholders' pro rata or distributive share of incomeand guaranteed payments are included in the qualified entity's qualified net income.
No, a qualified entity's qualified net income does not include the non-consenting partners', members', or shareholders' pro rata or distributive shares or guaranteed payments.
Qualified net income for purposes of the PTE elective tax would only include the consenting partners’, members’, or shareholders’ pro rata or distributive share of income and guaranteed payments subject to the California personal income tax, which would be determined through application of any applicable sourcing rules.
In general, for an S Corporation this will be the sum of lines 1-10 minus the sum of lines 11 and 12 on the K-1 (100S) and for a partnership this will be the sum of lines 1-11 minus the sum of lines 12 and 13 on the K-1 (565/568).
The net negative number is not included in determining the amount of tax to be paid or computing any credit.
Who gets the credit
Yes, for taxable years beginning on or after January 1, 2021, the PTE credit may reduce the amount of tax due below the tentative minimum tax.
Generally, estates or trusts are able to pass credits through to beneficiaries.
The partnership can file a group return, but the PTE elective tax credit cannot be claimed on a group return because it is not a flow-through item from the entity. The PTE elective tax credit is available only on the individual return of the qualified taxpayer.
Yes, a grantor trust may consent to having its pro rata or distributive share of income subject to tax under Part 10 included in the qualified entity’s qualified net income. The grantor may generally claim the credit received from the trust on their return.
Qualified net income
No, gain or loss on the disposition of the qualified entity (i.e. sale of partnership or LLC membership interest or S Corporation stock) is owner level income that is not included in the pro rata or distributive share. Therefore, it is not included in the qualified entity's qualified net income.
Yes, the elective tax is imposed on the qualified net income of the PTE. Gain from the PTE’s sale of an entity level asset is included in the pro rata or distributive share of a partner, member, or shareholder.
The PTE elective tax liability is not included when computing the qualified entity’s estimated taxes due under Revenue and Taxation Code (RTC) section 19136.
However, the PTE tax credit does reduce the computation of estimated payments for qualified taxpayers.
The qualified entities’ election does not affect the 7% withholding requirement.
Payments and forms
FTB will offer penalty relief on a case by case basis for the Electronic Funds Transfer (EFT) penalties assessed due to the Pass-Through Entity Elective Tax that was paid by check.
For the penalty to be abated, FTB needs to determine that reasonable cause exists.If the taxpayer experienced difficulties with Web Pay and was instructed by FTB to pay via check, include that information in the taxpayer’s abatement request. For all other scenarios, include all relevant facts and circumstances in the taxpayer’s abatement request.
Business Entity EFT Penalty abatement requests can be submitted in writing. Requests can be faxed to 916-855-5556. Include corporation ID number, amount of payment, tax year, and reason for request. For additional BE EFT penalty questions, contact 916-845-4025.
A qualified entity is required to make 2 timely payments.
The PTE elective tax payment can be made electronically using Web Pay on FTB's website. Entities can use Web Pay to pay for free and to ensure the payment is timely credited to their account. Entities can also use the Pass-Through Entity Elective Tax Payment Voucher (FTB 3893) to make a PTE elective tax payment by printing the voucher from FTB's website and mailing it to FTB.
The tax is based on the qualified net income of the qualified entity, and the correct amount of tax must be paid by the due date of the original return. Applicable penalties and interest will apply to underpaid amounts. For the PTE credit, the credit amount is based on the taxpayer's pro rata or distributive share of income subject to tax under Part 10 that is subject to the qualified entity's election.
Underpayments of prepayments due by June 15 of taxable years beginning on or after January 1, 2022, and before January 1, 2026 will result in an inability to make the PTE tax election.
If the entity overpaid the tax, the overpayment will be applied to other liabilities or refunded to the entity after a tax return is filed. For the PTE credit, the credit amount is based on the taxpayer's pro rata or distributive share of income subject to tax under Part 10 that is subject to the qualified entity's election.
For each taxable year beginning on or after January 1, 2022, and before January 1, 2026, on or before June 15th of the taxable year of the election, an amount equal to or greater than, either 50 percent of the elective tax paid the prior taxable year or one thousand dollars ($1,000), whichever is greater. For 2022 taxable years, the June 15 prepayment amount will be the greater of either 50% of the 2021 elective tax paid or $1,000.
No, qualified entities that would like to pay the PTE elective tax must meet the statutory deadlines.
Revenue and Taxation Code (RTC) section 17039 sets out the order of credit application. For taxable years beginning before January 1, 2022, the PTE credit falls under RTC section 17039(a)(5)(A) because it is a credit that can reduce the amount of tax due below the tentative minimum tax. For taxable years beginning on or after January 1, 2022, the PTE credit falls under RTC section 17039(a)(7) and must be applied after the other state tax credit.
For more information, visit June 2022 Tax News article Senate Bill (SB) 113 credit ordering rules