California Pass-Through Entity Tax
The California pass-through entity tax is a new state-level tax that reduces a qualified owner's personal California income tax. It was enacted in 2021 through Assembly Bill 150 and applies to qualifying entities that annually elect to pay an entity-level tax on income.
As of February 2024, thirty-two states have enacted pass-through entity elective taxes (PTETs). In California, qualified entities may make an irrevocable annual election to pay the PTET on their qualified net income. The elective tax is 9.3% of the sum of the eligible partners, shareholders, and members’ pro rata or distributive share of the PTE’s qualified net income. Each qualified taxpayer receives a nonrefundable credit against their individual California state income tax liability for their share of the elective tax paid by the PTE, and any unused credit can be carried over for up to five years.
This new tax allows owners of pass-through entities to avoid the federal $10,000 limitation on state and local tax deductions by paying their state taxes at the entity level. This strategy requires careful tax planning and consideration of the various nuances involved. Depending on the situation, highly compensated individuals could be particularly beneficial in using this workaround. A reputable and experienced financial professional can help evaluate this option for a client’s specific situation. The PTET must be paid by the due date of the original business tax return, not including extensions.
How to File California PTET?
A PTE must file Form 3893, Pass-Through Entity Elective Tax Payment Voucher, to make the election. The PTE must also report the first payment on its return’s original due date (without extensions). The tax is not a penalty and is in addition to, not in place of, any other state taxes or fees.
It’s important to note that the decision to pay the California PTET should be carefully considered. The benefits of doing so could be significant, but the nuances of each PET regime are complex and will depend on an individual’s geographic footprint, income profile, and business needs.
California PTET Due Dates
The annual PTET election is made on an original, timely filed tax return and is irrevocable for the year. The PTET must be paid in full by June 15 of the year. A qualified taxpayer may also elect to reduce their other state tax credit (OSTC) by any PTET credits claimed.
To make a PTET payment, the entity must use the free Web Pay application accessed via the Franchise Tax Board website. They must select ST: CA and TYPE: PP in view mode to generate two vouchers. Voucher 1 is due on June 15, and voucher 2 is due on March 15. The PTET payments cannot be combined with regular quarterly estimated tax payments.
