Help with pass-through entity elective tax (2024)

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

For more information, visit PTE election.

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 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 a return is a superseding return, the PTE election can be made or revoked on that superseding return. The superseded return(s) in (1) and (2) are treated as the original timely filed return.

Superseding return examples:

Cannot elect: Taxpayer files on the original due date and then files a return after the original due date and before the extended due date. Taxpayer cannot make a PTET election on the second return because it is not a superseding return. The second return is an amended return.

Can elect: Taxpayer files after the original due date and then files a second return before the extended due date. Taxpayer can make a PTET election on the second return because it is a superseding return and treated as an original timely filed return.

On May 1, 2022, taxpayer-partnership, a calendar year taxpayer, filed an original return and did not make a PTET election. On September 10, 2022, taxpayer-partnership filed an amended return and made a PTET election. The amended 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 PTET election is valid.

On February 10, 2022, taxpayer-partnership, a calendar year taxpayer, filed an original return and did not make a PTET election. On March 15, 2022, taxpayer-partnership filed an amended return and made a PTET election. The amended return is a superseding return because the original return was filed on or before the original due date of March 15, 2022, and the amended return was filed on the original due date of the return. The PTET election is valid.

On March 10, 2022, taxpayer-partnership, a calendar year taxpayer, filed an original return and did not make a PTET election. On September 10, 2022, taxpayer-partnership filed an amended return and made a PTET election. The amended return is not a superseding return because the original return was filed prior to the original due date of March 15, 2022, and the amended return was filed after the original due date of March 15, 2022, even though the amended return was filed within the extended due date. The PTET election is NOT valid.

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.

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.

• R&TC 19900(a)(2)
• R&TC 25101

For an S Corporation, the 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 share of income should be included in QNI even if they are not included in the above Schedule K-1 lines. For example, 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.

Provided a qualified entity made a valid election on its original return, if the increase in the entity’s taxable income causes an increase in the entity’s “qualified net income,” the qualified entity must file an amended return to increase its PTE elective tax for the taxable year and pay the additional PTE elective tax amount. Applicable penalties and interest will apply to underpaid PTE elective tax amounts. The qualified taxpayers can revise their tax credit on the corrected “qualified amount” by filing an amended return to report and claim the increased credit. Note, this could affect (increase) the amount that is or was required for the June 15 pre-payment for the succeeding taxable year.

The qualified entity may also file an amended return, provided it made a valid election on its original return, to decrease its PTE elective tax. If so, the qualified entity would also need to file an amended Form 3804, Pass-Through Entity Elective Tax Calculation, to request a refund of the PTE elective tax overpayment.

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.

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 circ*mstances 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.

Business entities must make all PTE elective tax payments 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 Pass-Through Elective Tax Payment Voucher (FTB 3893). This includes elective tax payments due on or before the due date of the entity’s original return, without regard to any extension. The elective tax payment cannot be combined with the 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.

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 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.

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 prepayments, does a one-time sale in 2021 affect the June 15 prepayment amount?

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