Effective July 16, 2021, California Assembly Bill 150 (2021 Cal. Stat. Ch. 82) (AB 150), signed into law by Governor Gavin Newsom, establishes a new elective pass-through entity-level tax (PTE tax) of 9.3% for tax years beginning on or after January 1, 2021 and before January 1, 2026 for qualifying passthrough entities doing business in the state. The new bill will allow certain owners of flow-through entities to receive an elective credit for their share of passthrough entity-level state and local taxes deducted by partnerships and S corporations.
- Is owned solely by qualifying taxpayers (i.e., individuals, fiduciaries, trusts, estates, or entities taxable as corporations);
- Is not a publicly traded partnership; and
- Is not permitted or required to be in included in a California Combined Report.
A unique provision of the new PTE tax is that each qualifying taxpayer may separately elect to be subject to the tax. However, qualifying taxpayers that do not elect into the tax, do not prevent the qualifying entity from making the election. The PTE tax is calculated on the qualified net income of the qualified entity making the election computed at the rate of 9.3%.
For California resident taxpayers, the tax base presumably would include all distributive income from the passthrough entity. For non-resident taxpayers, the tax base would only include California source income.
A qualified entity makes the election annually on its original, timely filed return, and the election is irrevocable. For tax years beginning on or after January 1, 2021 and before January 1, 2022, the elective PTE tax is due and payable on or before the filing due date of the original return, without regard to extension. For each tax year beginning on or after January 1, 2022 and before January 1, 2026, the PTE must pay by June 15 of the tax year of the election the greater of 50% of the elective tax paid in the prior year, or $1,000. The PTE must then pay the remaining amount on or before the filing due date of the original return, without regard to extension. The elective PTE tax is in addition to any other required personal or corporate California income tax. In instances where the allowable credit exceeds the taxpayers net tax due, the excess credit is allowed as a carryforward to the following five tax years.
The new bill does not provide detailed guidance related to the mechanics of the election, such as the mechanism in which qualified partners make an election to have their qualified income included in the PTE tax base. We also expect additional guidance on the California Franchise Tax Board’s (FTB) determination of “qualified net income.”
Additional tax alerts will be issued as new guidance is published.
For more questions or information on this Tax Alert, please reach out to one of the following individuals: