Help with pass-through entity elective tax Frequently asked questions
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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.
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.
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, but the SMLLC is not a qualified taxpayer because 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 income and guaranteed payments are included in the qualified entity's qualified net income.
Is a qualified entity required to include the pro rata or distributive share and/or guaranteed payments 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 or guaranteed payments.
Does the electing qualified entity use post-apportionment or pre-apportionment pro rata or distributive share and guaranteed payments of qualified net income of consenting California nonresident partners, members, or shareholders?
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.
For an S Corporation, the qualified net income for a qualified taxpayer can generally be computed by taking the sum of Schedule K-1 (100S) lines 1-10 minus lines 11 and 12. For a partnership, the qualified net income for a qualified taxpayer can generally be computed by taking the sum of Schedule K-1 (565/568) lines 1, 2, 3, and 4c through 11 minus lines 12 and 13.
If the total of the lines of the 2021 K-1 is negative, how does that impact the computation of tax and credit?
The net negative number is not included in determining the amount of tax to be paid or computing any credit.
Who gets the credit
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.
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.
If an electing PTE pays the PTE elective tax and has a consenting 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.
Can a qualified entity file a California nonresident group return for its partners if it makes the PTE election?
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
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.
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 elective 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
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 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.
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.
Business entities must make all PTE elective tax payments either by using the free Web Pay application accessed through FTB’s website or by using the Pass-Through Elective Tax Payment Voucher (FTB 3893). This includes elective tax payments made with the entity’s return. The elective tax payment cannot be combined with the entity’s other tax payments. To pay 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 as PTE elective tax payments on the entity’s account.
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.
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 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.
No entities are able to carry forward an overpayment and designate it specifically or solely to the June 15 prepayment or PTE elective tax for future years. PTE elective tax paid can be carried forward and applied to other tax liabilities, with the excess refunded to the taxpayer. The 565 partnership return does not allow an overpayment to be applied to the following taxable year because these entities’ liability is typically limited to the $800 minimum tax, and these entities do not have other liabilities to apply overpayments to. For these entities, overpayments of PTE elective tax will be refunded to the entity.
For all entities, if the entity overpaid the PTE elective tax, the overpayment will be applied to other liabilities (if any) or refunded to the entity after a tax return is filed.
For each taxable year beginning on or after January 1, 2022, and before January 1, 2026, on or before June 15th during 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.
What happens if the June 15 prepayment is not timely paid or if after June 15 it is discovered that the prepayment amount paid on or before June 15 was an underpayment of the statutorily required prepayment?
Underpayments of prepayments due by June 15 for taxable years beginning on or after January 1, 2022, and before January 1, 2026 will result in an inability to make the PTE election for the taxable year for which the prepayment was not timely paid or underpaid at the time of the June 15 deadline.
Will any exceptions be made for otherwise qualified entities who missed the deadline for payment and/or election?
No, qualified entities that would like to pay the PTE elective tax must meet the statutory deadlines.
Are qualified entities formed after June 15 of the taxable year required to make the prepayment 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 prepayment requirement for that taxable year.
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
Taxpayers with Other State Tax Credit (OSTC)
For taxable years beginning on or after January 1, 2022, and before January 1, 2026, 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.