A pass-through entity (PTE) is a business structure in which the business income “passes through” to the owners, who then reports the income on their personal tax returns. This is in contrast to a C corporation, in which the business itself pays taxes on its profits.
There are several advantages to operating as a pass-through entity. Firstly, PTEs can help owners save on taxes by allowing them to deduct business expenses from their personal income.
Secondly, pass-through entities offer flexibility in how owners can distribute profits among themselves. And finally, pass-through entities provide owner-operators with personal liability protection from any liabilities incurred by the business.
To qualify as a PTE, businesses must meet certain criteria. For example, they must be organized as partnerships, limited liability companies (LLCs), or S corporations.
To qualify as a PTE, you must firstly be a qualified taxpayer. A qualified taxpayer is any person or entity that meets the requirements to be taxed as a pass-through entity. The following are some of the key criteria used to determine if a taxpayer is qualified as a pass-through taxpayer under PTE law or not:
To be a qualified taxpayer, you must be a partner, shareholder, or member that is subject to California personal income tax. Or alternatively, you must be a disregarded single-member LLC that is subject to California personal income tax.
Under PTE law, your business cannot be a disregarded business entity, which is a business that is not considered separate from its owners for tax purposes. Other types of entities that aren’t considered as qualified taxpayers under PTE law include corporations and partnerships.
There are a few factors that can disqualify your company from qualifying as a pass-through business. If your business is a publicly-traded partnership or an entity that is required or allowed to be in a combined reporting group, then you will be disqualified from qualifying as a PTE.
The basic terms and conditions of the PTE election are as follows:
The elective tax is 9.3% of the entity’s qualified net income. The tax is imposed on the sum of the pro rata shares (which is the portion of the profit that each member is allocated) of the net income attributed to shareholders, partners, members, or owners consenting to the election.
There are two ways that you can pay the PTE tax. You can make a payment electronically using Web Pay or you can print a tax payment voucher (FTB 3893) from the Franchise Tax Board (FTB) website, which you can then mail to the FTB. Keep in mind that the payment will remain as a PTE elective tax once you make the payment until a tax return is filed.
There are a few things that you should consider before you decide to make yourself eligible for pass-through entity election under California tax law. These include:
In California, not all of the owners of an entity electing to become a PTE need to be included. This may be advantageous for businesses with out-of-state owners who would not otherwise benefit from the PTE rules.
Additionally, as long as you meet California’s definition of a qualified entry, general partnerships are eligible for the PTE election.
To claim your tax credits under a PTE, you will need to file a return with the Franchise Tax Board. The form that you will need to use will depend on the type of business entity that you have, your income for the year, and whether or not you are making an annual or quarterly payment.
Generally, you will need to provide information about your business income, deductions, and any other tax credits that you are claiming in order to calculate your final tax liability.
While the tax credits offered under the PTE rules can be extremely beneficial to businesses, it is important to note that there are certain limitations in place.
Once a business has elected to become a PTE, they will be able to claim the associated tax credits for a period of five years.
However, it is important to note that these credits will not be available indefinitely, and businesses should make sure to take advantage of them while they can. If a business no longer qualifies under the PTE rules, they will need to end their election or they may face penalties.
As such, businesses should carefully consider their decision to become a PTE and make sure that it is the right choice for their situation.
If you are a business that is considering becoming a pass-through entity, our team at JR Martin CPA can help. Our experienced accountants are well-versed in state and federal tax laws and regulations governing PTEs. We can work with you to determine whether this type of election is the right choice for your business.
We will help you to understand the benefits of PTE and can guide you through the process of electing, allowing you to take advantage of the many benefits that a PTE status can offer. The following are a few specific ways that we can help:
To elect to become a PTE, businesses must obtain consent from their owners and file a consent form with the relevant tax authorities. This may involve obtaining approval from a majority of all of the owners, depending on the business structure. At J.R. Martin CPA, we can help you to navigate the consent process and ensure that you have all of the necessary paperwork in place.
Our team at JR Martin CPA is experienced in decoding tax laws and can help businesses to understand how the PTE rules apply to their specific situation. We will help you to understand the benefits of a PTE and can provide guidance on the tax filing process, including how to claim PTE-related tax credits.
Additionally, our experts can help you to understand the potential implications of your PTE status and can provide advice on how to minimize your tax liability.
In addition to helping businesses understand the tax implications of PTE, we can also help you to take full advantage of the available tax credits and deductions. Our experts are well-versed in the various tax credits that may be available to PTEs and can help you to identify opportunities for maximizing your credits.
We will work with you to ensure that you are taking advantage of all available tax benefits and help you to minimize your overall tax liability.
In order to file your taxes as a PTE, you will need to compile relevant financial records, including income and expenses. At J.R. Martin CPA, we can help you to gather these records and organize them in a way that makes it easy for tax authorities to review. Additionally, we can help you to understand what records you will need to keep in order to comply with PTE tax rules.
Finally, we can help you to fill out and file the appropriate tax forms for your company. This includes filing the necessary documentation to elect PTE status as well as the forms required to claim PTE-related tax credits. We will ensure that all of the necessary paperwork is filed correctly and in a timely manner, minimizing the risk of penalties and other issues.
If you are a California-based business that is thinking about becoming a PTE, it is important to consult with experienced tax professionals to ensure that you are taking advantage of all available benefits.
At J.R. Martin CPA, we have the expertise and experience to help businesses understand how California tax laws can benefit their business and maximize their tax credits. With our help, you can make the PTE election work for your business and take full advantage of the benefits that a PTE status can offer.
Fill out the form on the right to learn more about how pass-through entity elections can work for your business.