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.

How does a qualified entity make the PTE election?

A qualified entity must make the election on its original, timely filed return.

For more information, visit PTE election.

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 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.

Is a disregarded entity a qualified entity?

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

Is a disregarded entity eligible to receive the PTE credit?

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

Is an entity with a partner, member, or shareholder that is a partnership a qualified entity?

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.

Can a general partnership be a qualified entity?

Yes, as long as the general partnership also meets the qualifications for the PTE election. For more information, refer to qualified entities.

What is included in the qualified entity's qualified net income

What is included in 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.

Is a qualified entity required to include the pro rata or distributive share of non-consenting partners, members, or shareholders in the 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.

Who gets the credit

Can the PTE credit reduce the amount of tax due below the tentative minimum tax?

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

Qualified net income

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

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

Payments and forms

How do I pay the PTE elective tax for taxable years beginning on or after January 1, 2022, but before January 1, 2026?

A qualified entity is required to make 2 timely payments.

Will FTB provide a method to make the payment prior to the end of the 2021 year?

Yes, in November 2021, FTB will provide a method for payment before the due date of the return.

Taxpayers must use Pass-Through Entity Elective Tax Payment Voucher (FTB 3893).

Please check back for details.