June 15th marks the deadline to make the first of two Passthrough Entity (PTE) elective tax payments for qualifying PTEs. Qualified entities can make an election to pay a passthrough entity tax equal to 9.3% of its qualified net income. This tax is deductible on the federal entity return and decreases the federal net income included on a qualified taxpayer’s K-1.
A qualifying passthrough entity is an entity taxed as a partnership or S corporation. While a qualified taxpayer is a partner, member, or shareholder of an electing qualified entity that is a partnership, S corporation, or an LLC that is taxed as a partnership or S corporation, a taxpayer must consent to having their pro rata or distributive share and guaranteed payments included in the qualified net income of the electing, qualified PTE.
What is due and when?
For the 2021 tax year, the tax is due by the date of the original return without regard to extensions, which was March 15, 2022. For the upcoming 2022-2025 taxable years, the entity will need to make two payments. The first payment will be due by June 15th of the taxable year. The amount due will be determined by which is the greater: fifty percent of the elective tax paid for the prior year or $1,000. The remainder will be due by the entity’s original filing deadline, which is March 15th for a calendar year PTE. Once the election is made, it is irrevocable for that year and is binding on all partners, shareholders, and members of the PTE.
The June 15th deadline applies to both calendar and fiscal year PTE.
A PTE that did not pay the tax in the prior year only need to pay a $1,000 prepayment. A PTE whose prior year tax return is on extension and hasn’t been filed by June 15th of the current year needs to estimate the prior year liability. It is recommended to overestimate payment in these situations, just to be safe, since underpayments will result in the election being disallowed for the 2022 tax year. Additionally, a PTE will not be able to receive a refund of their estimated payments until its 2022 California tax return is filed. There are no exceptions to the fifty percent of prior year tax requirement for the June 15th payment.
What happens if that payment is late or underpaid?
If the June 15th prepayment is underpaid, the PTE is ineligible to make the election for that taxable year. If amounts paid by the original due date of the tax return are less than 9.3% of the entity’s qualified net income, calculated when the return was filed, the remainder will be due with the return and the entity will be subject to penalties and interest. If the tax is overpaid, the entity will be refunded the overpaid amount once the tax return is filed, subject to any outstanding tax liabilities or offsets.
How to pay.
The PTE elective tax payment can be made electronically (for free) using Web Pay on Franchise Tax Board’s (FTB) website. Entities can also use the Pass-Through Entity Elective Tax Payment Voucher (FTB 3893) to make a PTE elective tax payment by printing the voucher from FTB’s website and mailing it to FTB. Once the payment is made, the payment will remain as a PTE elective tax until a tax return is filed.
Author, Chris Ricker, CPA
Senior Tax Manager
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.