Pass-Through Entity Elective Tax: What It Is And Its Benefits

California has joined the ranks of numerous other states offering the California Pass-Through Entity Tax Election (CA PTE). This election is part of the efforts to provide relief after the economic hurdles businesses have faced in the past few years. This Election became available Jan. 1. 2021 and will remain in effect until Jan. 1, 2026.

To qualify for the PTE Election, you must be a partner, shareholder, or member that is subject to California personal income tax. Under PTE Law, you do not qualify if your business is not considered separate from its owners for tax purposes.

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. 

How The Tax Is Calculated

The elective tax is 9.3% of the entity’s California 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.

Considerations Before The Election

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:

  • Non-resident issues: In other states, non-residents may not be able to take advantage of the PTE rules. However, this is not necessarily the case in California. 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.
  • Non-resident withholding: Entities who elect into the PTE tax are responsible for remitting withholding for any partners that are non-residents. If there are any non-resident owners that consent to the PTE, they should reduce any possible double remittance by applying for a non-resident withholding waiver exemption.

How To Claim Your Tax Credits Under A PTE

To claim your tax credits under a PTE, you will need to file a return with the Franchise Tax Board. You will need to  indicate that shareholders, partners or members of your business have consented to make the PTE election. The first payment of the PTE tax is due June 15 of each year. The balance is due with the filing of the tax return for that year. 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 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.

The amount of tax credit that can be claimed by businesses under the PTE rules is capped at $1 million tax credits in a given year.

Do PTE Tax Credits Have An Expiration Date?

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.

J.R. Martin Can Help You

If you are a business that is considering becoming a pass-through entity or making the PTE Election for the first time, 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 becoming a pass-through entity and making 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.

Discuss Consent For Election

To take the PTE Election, 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.

Decode Tax Laws

Our team at JR Martin CPA is experienced in decoding tax laws.  We 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.

Maximize Tax Credits

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.

Compile Relevant Financial Records

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.

Fill Out And File Important Forms

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.

Make The PTE Election Work For Your Business

If you are a California-based business that is thinking about becoming a PTE or taking the PTE Election, 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 above to learn more about how J.R. Martin can make the pass-through entity election work for your business.

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