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The California Governor signed Assembly Bill 150 on July 16, 2021. This alert is focused on the Small Business Relief Act Portion of the bill and the related establishment of a California pass-through entity (“PTE”) elective tax.
California now joins several other states, such as New York and New Jersey, that have created a PTE tax, providing qualified pass-through entity owners a workaround of the federal $10,000 limit on state and local taxes deductions.
PTE Tax Eligibility
The PTE tax is effective for elective qualifying entities for tax years beginning on or after January 1, 2021, through December 31, 2025. Qualifying entities are partnerships or S corporations with owners that are exclusively corporations, individuals, fiduciaries, estates, and trusts. Qualifying entities do not include PTE’s with owners that are partnerships, publicly traded partnerships, or entities required to be included in a California combined reporting group.
Additionally, “qualified taxpayers” include individuals, fiduciaries, estates, and trusts (does not include corporations) that consented to have their pro-rata or distributive income be subject to the PTE Tax.
PTE Tax Structure
The PTE tax is 9.3% of qualified net income, which is the qualified taxpayers' pro-rata or distributive income subject to California income tax.
PTE Owner Tax Credit
A qualifying taxpayer may claim a nonrefundable credit to offset their California individual income taxes equal to 9.3% of the qualified taxpayer’s qualified net income subject to the PTE tax. PTE tax credit exceeding the qualified taxpayer’s current year California personal income tax may be carried forward for up to five years.
PTE Tax Election
The PTE tax requires an annual election on an original, timely filed return, which is irrevocable for that year and is binding on all owners of the PTE.
PTE Tax Payments
For taxable years beginning on or after January 1, 2021, and before January 1, 2022, the PTE tax is due on or before the due date of the original return ignoring any extensions.
For taxable years beginning on or after January 1, 2022, either 50% of the PTE tax paid in the prior year or $1,000, whichever is greater, is due by June 15 of the taxable year. If no payment is made by June 15 of the taxable year, the qualifying entity may not make the PTE election for that taxable year. The remainder of the PTE tax is due by the original due date of the PTE return ignoring extensions.
Summary of Benefits and Key Considerations
Douglas Andersen, Partner | email@example.com | (562) 216-5512
Nancy Chher, Principal | firstname.lastname@example.org | (562) 216-1814
Goran Jovicic, Senior Manager | email@example.com | (562) 216-5539