The California PTE Elective Tax Credit

Overview of the California PTE Elective Tax Credit

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The California PTE Elective Tax Credit is a special tax option available to certain pass-through entities, such as partnerships and S corporations. It was created to help business owners work around the federal $10,000 cap on state and local tax (SALT) deductions for individuals. By allowing the entity itself to pay California income tax on behalf of its owners, the PTE regime provides both a federal tax benefit and a California tax credit to the owners.

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Key Benefits

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• Federal Tax Deduction: When the PTE pays the California tax at the entity level, it can deduct this payment as a business expense on its federal tax return. This deduction is not subject to the $10,000 SALT cap that applies to individuals.

• California Tax Credit: Each owner who consents to participate receives a credit on their California personal income tax return for their share of the PTE tax paid. If the credit exceeds their California tax liability, the unused portion can be carried forward for up to five years.

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Who Can Participate?

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• Eligible entities include partnerships and S corporations with owners who are individuals, trusts, estates, or certain single-member LLCs.

• The election is not available to publicly traded partnerships, entities in a combined reporting group, or entities with partnerships as owners.

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What Is Expected of the Taxpayer?

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• Consent: Each owner must consent to have their share of income included in the PTE’s qualified net income for the election.

• Claiming the Credit: Owners must claim the credit on their California personal income tax return. If the credit is more than the tax owed, the excess can be carried forward for up to five years.

• Coordination with Other State Credits: For tax years 2022–2025, when calculating credits for taxes paid to other states, taxpayers must adjust their California net tax by the amount of PTE credit used.

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Important Due Dates

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• Election: The PTE must make the election annually on a timely filed original tax return. The election is irrevocable for that year and applies to all consenting owners.

• Payments: For tax years 2022–2025, two payments are required:

  1. First Payment: Due by June 15 of the taxable year. This payment must be the greater of $1,000 or 50% of the elective tax paid for the prior year.

  2. Second Payment: Due by the original due date of the return (generally March 15 for calendar-year entities), not including extensions, for the remaining balance.

• Payments must be made separately from other tax payments, using the Franchise Tax Board’s Web Pay system or the designated payment voucher.

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Additional Considerations

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• The election is binding and cannot be changed once made for the year.

• The PTE election does not affect the requirement to withhold 7% on distributions to nonresident owners.

• Only the income of consenting owners is included in the calculation for the PTE tax.

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Summary

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The California PTE Elective Tax Credit is a valuable tool for eligible business owners to maximize their federal tax deductions and receive a California tax credit. To benefit, owners must ensure their entity makes a timely and irrevocable election, that all required payments are made on time, and that they properly claim the credit on their personal returns. Careful attention to deadlines and compliance is essential to take full advantage of this opportunity.

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How To Pay

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To make a payment online for the California Pass-Through Entity (PTE) Elective Tax using the Franchise Tax Board’s (FTB) Web Pay system, follow these detailed steps:

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1. Access the FTB Web Pay System

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• Go to the California Franchise Tax Board’s website: https://www.ftb.ca.gov

• Navigate to the “Web Pay” section. This can typically be found under “Make a Payment” or by searching for “Web Pay” in the site’s search bar.

• Select “Web Pay for Businesses” (since PTEs are business entities).

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2. Log In or Proceed as a Guest

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• You may log in using your MyFTB account for additional features, but it is not required. You can proceed as a guest by providing the entity’s information.

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3. Select the Type of Payment

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• Choose the payment type as “Pass-Through Entity Elective Tax.”

• Ensure you do NOT combine this payment with other entity tax payments (such as annual franchise tax or LLC fee). The PTE elective tax payment must be made separately.

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4. Enter Entity Information

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• Enter the entity’s:

  • Federal Employer Identification Number (FEIN)

  • California Corporation Number or Secretary of State (SOS) file number (if applicable)

  • Legal business name

  • Contact information

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5. Enter Payment Details

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• Specify the tax year for which the payment is being made (e.g., 2024).

• Enter the payment amount. For the first payment (due by June 15), pay the greater of $1,000 or 50% of the elective tax paid for the prior taxable year. For the second payment (due with the return), pay the remaining balance.

• Select the payment date (the date you want the payment to be processed).

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6. Select Payment Method

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• Choose your payment method (bank account information for ACH debit is required).

• Enter the bank routing number and account number.

• Confirm the account type (checking or savings).

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7. Confirm and Submit

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• Review all entered information for accuracy.

• Confirm that the payment is for the “Pass-Through Entity Elective Tax.”

• Submit the payment.

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8. Retain Confirmation

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• After submission, you will receive a confirmation number and a summary of your payment.

• Print or save this confirmation for your records.

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Special Notes and Codes:

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• When making the payment, ensure you select the correct payment type (“Pass-Through Entity Elective Tax”) to ensure the payment is properly applied.

• Do not use the payment voucher (FTB 3893) if paying online; the voucher is only for check payments by mail.

• If your entity is subject to mandatory e-pay (total tax liability, including PTE elective tax, exceeds $80,000, or any single payment over $20,000), you must use Web Pay or another electronic method.

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Summary Table of Key Steps:

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​​​Additional Tips:

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• Payments made via Web Pay are posted immediately to the entity’s account.

• If you experience technical issues, contact the FTB for assistance.

• For future reference, the FTB may update the Web Pay interface, so always follow on-screen instructions and verify you are selecting the correct payment type.

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By following these steps, you will ensure your California PTE Elective Tax payment is made correctly and timely using the FTB’s Web Pay system.