What You Need to Do Now to Be Eligible for California’s 2022 PTET

For tax years beginning on or after January 1, 2021 and before January 1, 2026, certain California Pass-Through Entities (PTEs) can annually elect to pay a 9.3% entity-level state tax on qualified net income. Consenting qualified partners and shareholders in turn receive a state credit for their share of the Pass-Through Entity Tax (PTET), which is also deductible for federal tax purposes and thereby reduces their overall personal income tax. Qualified partners and shareholders include individuals, fiduciaries, estates, and trusts subject to California personal income tax, as well as disregarded single member limited liability companies that are owned by an individual, fiduciary, estate, or trust subject to California personal income tax. Beginning January 1, 2022, a PTE must adhere to a special procedure in order to be eligible to make the PTET election. See the FAQs below for more information.

Q: What is different about the 2022 California PTET election compared with the procedure used in 2021?

A: In 2021, a PTE made its PTET election on, and remitted the applicable tax with, its timely filed income tax return. For 2022, a similar election must be made on the timely filed PTE return. However, prior to the 2022 tax return’s filing, an estimated PTET payment must be made.

Q: When must this PTET payment be made?

A: For tax years 2022 through 2025, an electing California PTET must make two payments. The first payment (for the greater of 50% of the PTET paid for the prior year, or $1,000) must be made by June 15th of the taxable year for both calendar year and fiscal year PTEs. The second payment must be made by the PTE’s filing deadline without extensions (March 15th for calendar year taxpayers).

If the June payment is underpaid or not paid, the PTE will be ineligible to make the election for that taxable year. There are currently no exceptions to this rule, even if a PTE anticipates its 2022 PTET liability to be less than 50% of its 2021 liability. If a PTE is currently on extension with California for tax year 2021, it is encouraged to overestimate the 2021 PTET when projecting the June 15th estimated payment.

If a PTE underpays the June 15th estimate and does not qualify for the 2022 PTET, any funds that were paid in but not utilized for the PTET can be claimed as a refund in the PTE’s 2022 tax filing.

Q: What should a PTE do if it did not elect into the 2021 PTET and therefore had no elective tax due for the prior year, but is nevertheless considering opting in for 2022?

A: The PTE should make an estimated June 15th payment of $1,000 to retain its eligibility to elect into the 2022 California PTET.

Q: Can the June 15th PTET estimate be considered by a PTE’s consenting shareholders and partners when calculating their personal second quarter tax estimates?

A: While PTET estimates are technically not considered estimated tax payments on behalf of a qualified shareholder or partner, they may result in a decrease in the owner’s ultimate California tax liability, which results in reduced estimated tax payment amounts. Therefore, if the June 15th payment reflects a PTE’s actual 2022 PTET, the payment can be factored into an owner’s projected estimated taxes due. But a note of caution is that if the June 15th estimate is anticipated to be more than the 2022 PTET liability, one may not want to reduce an owner’s estimates based on this payment because any excess PTET payments will be refunded to the PTE and will not pass through to the owner, resulting in an underpayment of California taxes.

If you have questions about the California PTET and the related estimated payment requirements, please contact Alan Goldenberg, Principal and Leader of Anchin’s State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.