Help with pass-through entity (PTE) elective tax Frequently asked questions

Senate Bill (SB) 132 and changes to the PTE elective tax and credit

Senate Bill (SB) 132 extended the PTE elective tax and credit for taxable years beginning on or after January 1, 2026, and before January 1, 2031. SB 132 added Part 10.4.1 of Division 2 of the Revenue and Taxation Code ("R&TC") and added section 17052.11.

There are three notable changes made by SB 132:

1. First, R&TC section 19914(b) allows qualified entities that fail to make the required payment on or before June 15 of the taxable year of the election, to still make the PTE elective tax election for that taxable year.
2. Second, if the qualified entity fails to make the required June 15 payment, the qualified taxpayer's PTE elective tax credit is reduced by 12.5% of the qualified taxpayer's pro rata share of the unpaid amount that was due on June 15. (R&TC section 17052.11). Refer to the "credit reduction for taxable years beginning on or after January 1, 2026, and before January 1, 2031" section for an example on how the reduction is calculated.
3. Third, the credit under both R&TC sections 17052.10 and 17052.11 is allowed for the 2026 and 2031 taxable years, respectively, in situations where the qualified entity making the PTE elective tax election is a fiscal year filer and has a different taxable year beginning than its qualified taxpayer.

PTE elective tax election and qualifications

Only qualified entities may make a PTE elective tax election to pay the entity-level elective tax.

1. How does a qualified entity make the PTE elective tax election?

   To make a valid PTE elective tax election, a qualified entity must meet the election requirement and, for most years, the payment requirement.

   Election Requirement

   A qualified entity must make the election on a timely-filed original return by filing a completed FTB 3804 with the qualified entity's return and including the PTE elective tax amount on the designated line of the qualified entity’s return. The PTE elective tax election cannot be made on an amended return.

   Payment Requirement

   In addition to the election requirement, for taxable years beginning on or after January 1, 2022, a qualified entity must pay 50 percent of the elective tax paid in the prior year or $1,000 on or before June 15 during the taxable year of the election to make a valid election.

   For taxable years beginning on or after January 1, 2022, and before January 1, 2026, if a qualified entity fails to make the required June 15 payment, it may not make the PTE elective tax election for that taxable year

   For taxable years beginning on or after January 1, 2026, and before January 1, 2031, if a qualified entity fails to make the required June 15 payment, the qualified entity may still make the PTE elective tax election. However, the qualified amount of the PTE elective tax credit allowed to its qualified taxpayers is reduced by 12.5% of the qualified taxpayer's pro rata share of the amount due but not paid. Refer to the "credit reduction" section for more information and an example of how to calculate the reduced credit.

   For more information and applicable forms for the PTE elective tax election and credit, visit PTE Elective Tax.

2. Can a qualified entity have a disregarded entity as a partner, member, or shareholder?

   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 elective tax election, but having a disregarded entity as a partner, member, or shareholder will not prevent the entity from being a "qualified entity".

   For more information, refer to Rev. Rul. 2004-77 and FTB Legal Ruling 2019-02.

3. Is a disregarded entity a qualified entity?

   A disregarded entity cannot be a qualified entity because it is not taxed as a partnership or S corporation.

4. Is a disregarded business entity eligible to receive the PTE elective tax credit?

   Generally, no, a disregarded business entity and its owners cannot receive the PTE elective tax credit because it is not considered a qualified taxpayer. However, a disregarded single member limited liability company (SMLLC) 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.

5. Is a trust a qualified taxpayer?

   Yes, a trust that is included in the definition of “taxpayer” under Revenue and Taxation Code (R&TC) section 17004 can be a qualified taxpayer that can receive a PTE elective tax credit .

6. Can a qualified entity have a partner, member, or shareholder that is a partnership?

   Yes.

7. Can Partnership A make the election if it has a SMLLC partner that is a disregarded business entity for tax purposes and is wholly owned by Partnership B?

   Yes, if Partnership A has another owner that is a qualified taxpayer, it can make the PTE elective tax election. However, the disregarded SMLLC is not a qualified taxpayer because it is not owned by an individual, fiduciary, estate, or trust.

8. Once a qualified entity makes a valid PTE elective tax election, can it make any amendments?

   No. Once a qualified entity makes a valid PTE elective tax election, it is irrevocable and all partners, shareholders, and members (consenting and nonconsenting) are bound by the qualified entity's election. The qualified entity cannot later amend Form 3804 to revoke the election or change the consenting partners, shareholders, or members in its election.

   The qualified entity, however, must revise its qualified net income (QNI) if there have been subsequent adjustments to its taxable income that would affect its QNI. Refer to the section on "What is included in a qualified entity's qualified net income (QNI)" question 1 for more information on revisions to QNI.

Election made on a superseding return

1. Can the PTE elective tax election be made on a superseding return?

   Yes. A return can be a superseding return only if either (1) the first return and the superseding return(s) were filed before the original due date or (2) the original return and superseding return(s) were filed on extension. If it meets these requirements, a superseding return is considered a replacement for the original return and is treated as if it were the original. An amended return is a corrected return filed after an original return that does not replace the original filing because it is filed after the applicable filing deadline for the original return.

   Below are 5 scenarios illustrating when the PTE elective tax election would be considered made on a superseding return or when it would be considered made on an amended return.

   For each of the scenarios below, assume the first return is filed without making the PTE elective tax election and the second return is filed with a PTE elective tax election.

   First Return filed*	Second Return filed**	Second Return is treated as	PTE Election
   1. Before original due date	Before or on original due date	Superseding Return	Considered made on a timely filed original return
   2. On or before original due date	After original due date and before or on extended due date	Amended Return	Cannot Elect
   3. On or before original due date	After extended due date	Amended Return	Cannot Elect
   4. After original due date and on or before extended due date	After original due date and on or before extended due date	Superseding Return	Considered made on a timely filed original return
   5. Before or after the original due date	After extended due date	Amended Return	Cannot elect

   * First return is filed without making the PTE elective tax election.

   ** Second return is filed with a PTE elective tax election.

   If a return is a superseding return, the PTE elective tax election can be made or revoked on that superseding return.

   Superseding return examples:

   Example 1

   On May 1, 2022, taxpayer-partnership, a calendar year taxpayer, files a 2021 original return without making a PTE elective tax election. On September 10, 2022, taxpayer-partnership files a second 2021 return this time making a PTE elective tax election. The second return is a superseding return because both returns were filed after the original due date of March 15, 2022, and before the October 15, 2022, extended due date. The PTE elective tax election will be considered made on a superseding return.

   Example 2

   On February 10, 2022, taxpayer-partnership, a calendar year taxpayer, files a 2021 original return without making a PTE elective tax election. On March 15, 2022, taxpayer-partnership files a second 2021 return this time making a PTE elective tax election. The second return is a superseding return because both returns were filed on or before the original due date of March 15, 2022. The PTE elective tax election will be considered made on a superseding return.

   Example 3

   On March 10, 2022, taxpayer-partnership, a calendar year taxpayer, files a 2021 original return without making a PTE elective tax election. On September 10, 2022, taxpayer-partnership files a second 2021 return this time making a PTE elective tax election. The second return is not a superseding return because the original return was filed prior to the original due date of March 15, 2022, and the second return was filed after the original due date of March 15, 2022, even though the second return was filed within the extended due date. The PTE elective tax election will be considered reported on an amended return and not allowed.

How to report the PTE elective tax

1. If a PTE meets the requirements to make the PTE elective tax election, how must it report its California taxable income?

   If the qualified entity deducts the PTE elective tax for federal purposes, the amount of the PTE elective tax that was deducted must be added back for California purposes in computing the qualified entity's California net income. Refer to Tax News | FTB.ca.gov for more information.

What is included in a qualified entity's qualified net income (QNI)?

1. What is included in QNI?

   QNI is the sum of all 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 consenting and nonconsenting partners, members, or shareholders.

   Only consenting partners', members', or shareholders' pro rata share or distributive share of income and guaranteed payments are included in the qualified entity's QNI. When a partner, member, or shareholder provides consent, all of his or her pro rata share or distributive share of income and guaranteed payments are included in the qualified entity's QNI.

2. Is a qualified entity required to include the pro rata share or distributive share and/or guaranteed payments of non-consenting partners, members, or shareholders in the qualified entity’s QNI?

   No, a qualified entity's QNI does not include the non-consenting partners', members', or shareholders' pro rata share or distributive shares and guaranteed payments.

3. When a qualified entity sells an asset, will the gain or loss be included in calculating the QNI?

   Yes, the PTE elective tax is imposed on the PTE’s QNI. Gain from the PTE’s sale of an entity level asset is included in the pro rata share or distributive share of a partner, member, or shareholder.

4. To compute its QNI, does the electing qualified entity use post-apportionment or pre-apportionment pro rata share or distributive share and guaranteed payments of its qualified consenting California nonresident partners, members, or shareholders?

   QNI for purposes of the PTE elective tax would only include the qualified consenting nonresident partners’, members’, or shareholders’ pro rata share or distributive share of income and guaranteed payments subject to the California personal income tax, which would be determined by using applicable sourcing rules as necessary.

5. If a qualified taxpayer sells their interest in a qualified entity, will the gain or loss be included in the QNI of the qualified entity?

   No, gain or loss on the disposition of a 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 share or distributive share. Therefore, it is not included in the qualified entity's QNI.

6. What lines of the Schedule K-1 are used to determine a qualified taxpayer’s income included in the qualified entity's QNI?

   For an S Corporation, the share of QNI for a qualified taxpayer can generally be computed by taking the sum of the Schedule K-1 (100S) income (loss) lines 1-10 minus the deduction lines 11 and 12. For a partnership, the QNI for a qualified taxpayer can generally be computed by taking the sum of the Schedule K-1 (565/568) income (loss) lines 1, 2, 3, and 4c through 11 minus the deduction lines 12 and 13.

   For purposes of the PTE elective tax, these Schedule K-1 lines are generally included to compute QNI. However, all items of any distributive or pro rata share of income should be included in QNI even if they are not included in the above Schedule K-1 lines. For example, Internal Revenue Code (IRC) section 179 recaptured income should be included in QNI, and any gain from the disposition of IRC section 179-expensed property should be included in QNI with the gain computed at the PTE level even though adjustments to the gain are made at the PTE-owner level.

7. If the total of the lines from the qualified taxpayer’s K-1 is negative, how does that impact the computation of PTE elective tax and credit?

   If the sum of a partner’s or shareholder's distributive or pro rata share of PTE items is a negative number, the partner’s or shareholder's share of the PTE income is not included in the PTE's QNI for purposes of computing the PTE elective tax. The partner or shareholder will not have any credit.

8. If a qualified entity made a valid PTE elective tax election on its original return, and the qualified entity’s taxable income has subsequently changed (increase or decrease) for that tax year, must it file an amended tax return?

   Provided a qualified entity made a valid election on its timely filed original return, if the change in the qualified entity’s taxable income causes an increase or decrease in the qualified entity’s QNI, the qualified entity must revise its QNI in its election to increase or decrease its PTE elective tax for the taxable year and pay the additional PTE elective tax amount or claim a refund to any overpayment. Applicable penalties and interest will apply to any underpaid PTE elective tax amounts. Note, this could affect (increase or decrease) the amount that is or was required for the June 15 payment for the succeeding taxable year.

   Additionally, the qualified taxpayers must revise their PTE elective tax credit by filing an amended return, and including an amended Form 3804-CR, Pass-Through Entity Elective Tax Credit, and amended Schedule P, Part III, to report and claim the revised credit.

Who gets the credit

1. What is the credit amount for a consenting partner, member, or shareholder?

   For the PTE elective tax credit, the credit amount is equal to the net amount of the taxpayer’s pro rata share or distributive share of income income, and guaranteed payments subject to tax under Part 10 that is subject to the qualified entity's election multiplied by 9.3 percent.

2. Can the PTE elective tax credit reduce the amount of tax due below the tentative minimum tax (TMT)?

   Yes, the PTE elective tax credit may reduce the amount of tax due below the TMT.

3. If an electing PTE pays the PTE elective tax and has a qualified taxpayer that is an estate or trust, would the credit flow-through to the beneficiary(ies)?

   Generally, estates or trusts are able to pass credits through to beneficiaries.

4. Can a qualified entity file a California nonresident group return for its partners/shareholders/members if it makes the PTE elective tax election?

   The partnership/S corporation/LLC 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 qualified entity. The PTE elective tax credit is available only on the individual return of the qualified taxpayer.

5. Can a grantor trust pass the PTE elective tax credit to its grantor?

   Yes, a grantor trust may consent to having its pro rata share or distributive share of income, or guaranteed payments subject to tax under Part 10, Personal Income Tax Laws, included in the qualified entity’s QNI. The grantor may generally claim the credit received from the trust on their return.

6. Can a shareholder, partner, or member who did not claim the PTE elective tax credit amend their personal income tax return?

   Provided the qualified entity’s election is valid, and provided the shareholder, partner, or member consented to have his or her pro rata share or distributive share, and guaranteed payments, included in the qualified entity’s qualified net income, a shareholder, partner, or member can amend his or her personal income tax return to claim the PTE elective tax credit. The shareholder, partner or member must attach Form 3804-CR, Pass-Through Entity Elective Tax Credit, to the amended return.

7. Is the PTE elective tax credit subject to the 5 million credit limitation under R&TC section 17039.4?

   No

Credit ordering

1. In what order is the PTE elective tax credit applied?

   R&TC section 17039 sets out the order of credit application. For taxable years beginning on or after January 1, 2022, the PTE elective tax credit falls under R&TC section 17039(a)(7) and for taxable years on or after January 1, 2026 the PTE elective tax credit falls under (a)(8) and both must be applied after the Other State Tax Credit (OSTC).

   For more information, visit June 2022 Tax News article Senate Bill (SB) 113 credit ordering rules

Taxpayers with other state tax credits (OSTC)

1. How is OSTC calculated when a qualified taxpayer has both OSTC and the PTE elective tax credit?

   For taxable years beginning on or after January 1, 2022 where a PTE elective tax credit is allowed to calculate the OSTC, qualified taxpayers must increase the “net tax payable” by the amount of PTE elective tax credit that reduced "net tax", before application of the OSTC, in the same taxable year.

Credit reduction for taxable years beginning on or after January 1, 2026, and before January 1, 2031.

1. How does the credit reduction work?

   If a qualified entity does not make a payment by June 15 or a payment that is less than the amount required, and still makes a valid election, the "qualified amount" of the PTE elective tax credit is reduced by 12.5 percent of the qualified taxpayer's pro rata share of the amount due by June 15 but not paid.

2. What happens if the credit is incorrectly calculated by the qualified taxpayer?

   If the qualified taxpayer reports an incorrect amount of the PTE elective tax credit on its Form 3804-CR, FTB will disallow the excess credit.

3. In the context of the credit reduction, what happens if the qualified entity has an unusually high QNI in 2026 year and a significantly lower QNI in 2027?

   The payment required on or before June 15 of the taxable year of the election is based on 50 percent of the elective tax paid in the prior year or $1,000, whichever is greater.

   For example, if the qualified entity made a PTE elective tax election when it had an unusually high income year in 2026, the June 15 payment for the 2027 election will be based on the PTE elective tax paid in 2026. There are no statutory exceptions to the June 15 payment when a qualified entity has an unusually high income year. Consequently, if the qualified entity fails to make the required payment by June 15, 2027, its owners will be subject to the credit reduction.

4. How does the credit reduction get reported?

   The 2026 Form FTB 3804 allows qualified entities to calculate the reduced credit earned by its qualified taxpayers.

5. Example of Credit Reduction

   Facts

   2025 Taxable Year

   Partnership A has 4 partners (W, X, Y, and Z) each with an equal 25% interest in Partnership A. In 2025, W, X, Y and Z provide consent and Partnership A made a PTE elective tax election reporting qualified net income (QNI) of $500,000 and a PTE elective tax of $46,500 ($500,000 x 9.3%). Assume all other requirements were met for 2025.

   2026 Taxable Year

   Partnership A makes a June 15 payment of $10,000 on June 15, 2026. Partnership A was required to pay $23,250 (50% of the PTE elective tax in 2025 of $46,500). However, under R&TC section 19914(b), Partnership A is still eligible to make the election for 2026 if the other requirements are met.

   In 2026, this time only X, Y, and Z provide consent and Partnership A makes a PTE elective tax election on its timely filed original return. X, Y, and Z, had a pro rata share or distributive share and guaranteed payments of $100,000 each. On its return, Partnership A reports QNI of $300,000 (100,000 X+ 100,000 Y+ 100,000 Z), reports a PTE elective tax of $27,900 ($300,000 x 9.3%) and pays the remaining balance.

   Because Partnership A did not make the required June 15, 2026, payment of $23,250, partners X, Y, and Z are each subject to a reduced credit for the 2026 taxable year.

   Calculation

   The qualified amount under R&TC section 17052.11(b)(2)(B) is the amount calculated under (b)(2)(A) reduced by 12.5% of the pro rata share of the underpaid amount.

   If Partnership A had made the required June 15 payment, the qualified amount for each qualified taxpayer under (b)(2)(A) would have been 9.3% of each qualified taxpayers pro rata share of Partnership A's QNI or as calculated below:

   Credit amount for each partner—if payment requirement was met =

   $9,300 = 9.3% × $100,000 qualified taxpayer's share of income

   This amount is then reduced by 12.5% of each qualified taxpayer's pro rata share of the underpaid amount or as calculated below:

   Reduction amount = $552 = 12.5% × (23,250 - 10,000) × 100,000 / 300,000

   Qualified amount = $8,748 = $9,300 - $552

   X, Y, and Z are each allowed a credit of $8,748 for the 2026 taxable year.

Credit carryover

1. If the five-year carryover period for a PTE elective tax credit has not expired, can a taxpayer claim the unused PTE elective tax credit as a carryover in taxable years that the PTE elective tax credit is not operative?

   Yes. The five-year PTE elective tax credit carryover period is not impacted by the repeal of the PTE elective tax credit .

Taxpayers with behavioral health services tax (formally mental health services tax)

1. Can PTE elective tax credits apply to behavioral health services tax?

   No. The PTE elective tax credit cannot reduce the 1% behavioral health services tax (R&TC section 17043(c)(1)). Therefore, the PTE elective tax credit does not impact the computation of estimated payments due with respect to the behavioral health service tax.

Estimated taxes

1. Is the PTE elective tax included in the calculation of the underpayment of estimated tax penalty?

   The PTE elective tax liability is not included when computing the qualified entity’s estimated taxes due under R&TC section 19136.

   However, the PTE elective tax credit does reduce the computation of estimated payments for qualified taxpayers.

Nonresident withholding

1. What effect does the PTE elective tax election have on the nonresident withholding requirement?

   The qualified entities’ election does not affect the 7% withholding requirement.

Payments and forms

1. If an S-corporation that had mandatory e-pay requirement paid the PTE elective tax by check and received a penalty for paying by check, will the penalty be abated?

   FTB will offer penalty relief if a taxpayer establishes 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 (BE) 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.

2. When do I pay the PTE elective tax for taxable years beginning on or after January 1, 2022, but before January 1, 2031?

   A qualified entity is required to make two timely payments. The first payment must be made on or before June 15 during the taxable year of the election. And the second payment is due on or before the due date of the original return without regard to extension.

3. What is the method to make the payment?

   PTE elective tax payments must be made either by using the free Web Pay application accessed through FTB’s website, electronic funds withdrawal (EFW) using tax preparation software, or by using the applicable Pass-Through Elective Tax Payment Voucher (FTB 3893). This includes PTE elective tax payments due on or before the due date of the qualified entity’s original return, without regard to any extension. The PTE elective tax payment cannot be combined with the qualified entity’s other tax payments.

   Check with your software provider to determine if they support EFW for elective tax payments. If paying by EFW or Web Pay, do not file FTB 3893.

   If paying electronically, the payment must specifically be designated as a "PTE payment".

   If paying by voucher, print the FTB 3893 Voucher from FTB’s website and mail it to the FTB, along with the payment, to “Franchise Tax Board, P.O. Box 942857, Sacramento, CA 94257-0531.” Once made, the payments will remain on the entity's account as PTE elective tax payments for that tax year.

   Note: For each tax year, separate payment vouchers and/or EFW transactions should be used.

4. How are underpayments of the PTE elective tax treated?

   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 taxable years beginning on or after January 1, 2022, and before January 1, 2026, underpayments of the June 15 payment, will result in an inability to make the PTE elective tax election.

   For taxable years beginning on or after January 1, 2026, and before January 1, 2031, underpayments of the June 15 payment, will result in a reduced credit earned by the qualified taxpayers. Refer to the "credit reduction" section for more information and an example of how to calculate the reduced credit.

5. How are overpayments of the PTE elective tax treated?

   If the qualified entity overpaid the PTE elective tax, the overpayment will be applied to other liabilities or refunded to the qualified entity after a tax return is filed.

   A qualified entity cannot carry forward a PTE elective tax overpayment and designate it specifically or solely as a June 15 payment or as a PTE elective tax for future years.

   However, a PTE elective tax overpayment can be elected to apply to the following year's annual tax or fee for LLCs, or to apply to the following year's estimate tax for S Corporations.

6. For the June 15 payment, does a one-time sale in the prior year affect the June 15 payment amount?

   For each taxable year beginning on or after January 1, 2022, and before January 1, 2031, the payment due on or before June 15 of the taxable year of the election is calculated as either 50% of the elective tax paid the prior taxable year or one thousand dollars ($1,000), whichever is greater. Therefore, a one-time sale in the prior year may affect the June 15 payment amount for the following year's election.

7. What happens if the June 15 payment is not timely paid or if after June 15 it is discovered that the payment amount paid on or before June 15 was an underpayment of the statutorily required payment?

   For taxable years beginning on or after January 1, 2022, and before January 1, 2026, an underpayment of the June 15 payment will result in an inability to make the PTE elective tax election for the taxable year for which the June 15 payment was not timely paid or underpaid.

   For taxable years beginning on or after January 1, 2026, and before January 1, 2031, an underpayment of the June 15 payment, does not prohibit the qualified entity from making the PTE elective tax election for that taxable year. If the qualified entity fails to make the required June 15 payment, it may still make a PTE elective tax election for that taxable year. However, the qualified entity's qualified taxpayers will be subject to the reduced credit.

8. What is the due date for the June 15 payment of PTE elective tax when June 15 of the election year falls on a weekend or holiday?

   When June 15 falls on a weekend or holiday, the deadline to pay is extended to the next business day. For example, with respect to the 2024 election year, June 15 payments made on or before June 17, 2024, will be considered timely.

9. Will any exceptions be made for otherwise qualified entities who missed the deadline for June 15 payment and/or election?

   There are no statutory exceptions to the June 15 payment or election requirements. However, if the federal or state government has declared a major disaster for an area where the qualified entity has its principal place of business and the disaster relief provides additional time to pay the PTE elective tax June 15 payment or file a return, the qualified entity may be entitled to additional time.

10. Are qualified entities formed after June 15 of the taxable year required to make the June 15 payment in order qualify to make the election for the taxable year?

    Qualified entities whose taxable year does not include June 15 in its short period taxable year are not subject to the June 15 payment requirement for that taxable year.