Help with pass-through entity (PTE) elective tax Frequently asked questions

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

For more information, visit PTE Elective Tax.

Yes, as long as the general partnership also meets the qualifications for the PTE tax election. For more information, refer to Do you qualify?.

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 tax 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 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 tax credit because it is not considered a qualified taxpayer. However, a disregarded single member limited liability company (SMLLC) 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 (RTC) section 17004 can be a qualified taxpayer that can receive a PTE tax credit .

Yes.

Yes, but the disregarded SMLLC is not a qualified taxpayer because it is not owned by an individual, fiduciary, estate, or trust.

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 tax election can be made or revoked on that superseding return. The superseding 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 PTE tax 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 PTE tax 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 PTE tax election. On September 10, 2022, taxpayer-partnership filed an amended return and made a PTE tax 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 PTE tax election is valid.

On February 10, 2022, taxpayer-partnership, a calendar year taxpayer, filed an original return and did not make a PTE tax election. On March 15, 2022, taxpayer-partnership filed an amended return and made a PTE tax 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 PTE tax election is valid.

On March 10, 2022, taxpayer-partnership, a calendar year taxpayer, filed an original return and did not make a PTE tax election. On September 10, 2022, taxpayer-partnership filed an amended return and made a PTE tax 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 PTE tax election is NOT valid.

QNI 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 tax is binding on all of its partners, members, or shareholders.

No, a qualified entity's QNI does not include the non-consenting partners', members', or shareholders' pro rata or distributive shares or guaranteed payments.

Yes, the PTE tax is imposed on the PTE’s QNI. 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.

QNI for purposes of the PTE tax would only include the qualified 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 by using applicable sourcing rules as necessary.

For an S Corporation, the share of 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 tax, these Schedule K-1 lines are generally included to compute QNI. However, all items of any distributive or pro rata share of income should be included in QNI even if they are not included in the above Schedule K-1 lines. For example, Internal Revenue Code (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.

If the sum of a partner's or shareholder's distributive or pro rata share of PTE items is a negative number, the partner's or shareholder's share of the PTE income is not included in the PTE's QNI for purposes of computing the PTE tax. The partner or shareholder will not have any credit.

Provided a qualified entity made a valid election on its timely filed 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 tax for the taxable year and pay the additional PTE tax amount. Applicable penalties and interest will apply to underpaid PTE elective tax amounts. The qualified taxpayers can revise their PTE tax credit on filing an amended return, including an amended Form 3804-CR, Pass-Through Entity Elective Tax Credit, and amended Schedule P, Part III, 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 timely filed original return, to decrease its PTE 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 tax overpayment. The qualified taxpayers must correct their tax credit by filing an amended return to report the decreased tax credit .

For the PTE tax credit, the credit amount is equal to the net amount of 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 multiplied by 9.3 percent.

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

No, gain or loss on the disposition of a 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 QNI.

Yes, for taxable years beginning on or after January 1, 2021, the PTE tax credit may reduce the amount of tax due below the TMT.

Generally, estates or trusts are able to pass credits through to beneficiaries.

The partnership can file a group return, but the PTE tax credit cannot be claimed on a group return because it is not a flow-through item from the entity. The PTE 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, Personal Income Tax Laws, included in the qualified entity’s QNI. The grantor may generally claim the credit received from the trust on their return.

Provided the qualified entity’s election is valid, and provided the shareholder, partner, or member consented to have his or her pro rata or distributive share, and guaranteed payments, included in the entity’s QNI, a shareholder, partner, or member can amend his or her personal income tax return to claim the PTE tax credit. The shareholder, partner or member must attach Form 3804-CR, Pass-Through Entity Elective Tax Credit, to the amended return.

RTC section 17039 sets out the order of credit application. For taxable years beginning before January 1, 2022, the PTE tax 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 tax credit falls under RTC section 17039(a)(7) and must be applied after the Other State Tax Credit (OSTC).

For more information, visit June 2022 Tax News article Senate Bill (SB) 113 credit ordering rules

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 tax credit that reduced net tax, before application of the OSTC, in the same taxable year.

Yes. The five-year PTE tax credit carryover period is not impacted by the repeal of the PTE tax credit .

No. The PTE tax credit cannot reduce the 1% mental health services tax (RTC section 17043(c)(1)). Therefore, the PTE tax credit does not impact the computation of estimated payments due with respect to the mental health service tax.

The PTE tax liability is not included when computing the qualified entity’s estimated taxes due under RTC section 19136.

However, the PTE tax credit does reduce the computation of estimated payments for qualified taxpayers.

The qualified entities’ election does not affect the 7% withholding requirement.

FTB will offer penalty relief on a case by case basis for the Electronic Funds Transfer (EFT) penalties assessed due to the PTE 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 (BE) 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.

BE must make all PTE 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 applicable Pass-Through Elective Tax Payment Voucher (FTB 3893). This includes PTE tax payments due on or before the due date of the entity’s original return, without regard to any extension. The PTE 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 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.

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.

A qualified entity cannot carry forward a PTE tax overpayment and designate it specifically or solely to the June 15 prepayment or PTE tax for future years. However, a PTE tax overpayment 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 tax will be refunded to the entity.

For all entities, if the entity overpaid the PTE tax, the overpayment will be applied to other liabilities (if any) or refunded to the entity after a tax return is filed.