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".

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

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

No, a disregarded business entity and its owners cannot receive the PTE credit because it is not considered a qualified taxpayer.

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.

No, an entity with a partnership as a partner, member, or shareholder is not a qualified entity. A qualified entity's partners, shareholders, or members must be exclusively corporations or taxpayers, excluding partnerships.

No, an entity’s partners, shareholders, or members in that taxable year must be exclusively corporations, or taxpayers excluding partnerships. In this scenario, one of Partnership A's partners is a disregarded business entity that is wholly owned by another partnership, Partnership B. Because a separate partnership, Partnership B, is the next regarded owner, Partnership A does not meet the requirement of having partners that are exclusively corporations or taxpayers, excluding partnerships. Therefore, Partnership A cannot make the election.

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 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 income is 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.

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 subject to the 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 1-3 and lines 5-11 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

No, the PTE tax credit does not reduce the amount of tax due below the tentative minimum tax.

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.

Guaranteed payments are not considered part of an entity’s qualified net income because they are not part of the distributive share for purposes of the PTE elective tax.

Estimated taxes

Nonresident withholding

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

Payments and forms

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. 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.

Credit ordering

Revenue and Taxation Code (RTC) section 17039 sets out the order of credit application. The PTE credit falls under RTC section 17039(a)(2) because it is a credit containing a carryover provision, but does not contain refundable provisions.