2021-51: New passthrough entity tax information - Spidell

2021-51: New passthrough entity tax information

The FTB has been working closely with us to provide answers to our questions regarding California’s new passthrough entity tax (PET) workaround for the federal $10,000 state and local tax limitation. The good news is we have answers to two of your most urgent questions:

  • For entities who are looking to pay the PET now because they are filing a short year return for 2021: While the FTB is still developing the PTE elective tax payment vouchers, taxpayers may make payments using the Pending Audit Tax Deposit Vouchers. S corporations may use form FTB 3577, LLCs may use form FTB 3578, and partnerships may use form FTB 3579 to make the PTE elective tax payment in 2021. On these Pending Audit Tax Deposit Vouchers, enter the tax year as “2021” and check the “Other” box when making the payment. The FTB anticipates releasing the new PTE elective tax voucher before December 2021 and that voucher will provide instructions on how to make the PTE elective tax payment going forward. Note that for federal purposes the entities will only benefit from the reduction of net income on the 2021 K-1s if the payment is made before the end of the entity’s 2021 taxable year.
  • For taxpayers who are making third and/or fourth quarter estimated tax payments: R&TC §19136(c)(2) provides that the underpayment of estimated tax penalty is based on the tax imposed under R&TC §§17041, 17048, and 17062, less credits against tax provided by Part 10 (commencing with §17001). The newly-enacted credit is R&TC §17052.10, is included in Part 10 and therefore it is one of the credits that reduce the computation of estimated payments. This means that those taxpayers eligible to claim the credit may reduce their third and/or fourth quarter estimated tax payment to account for additional amounts that will be paid in through the new PET for 2021. Note that the PET credit that is passed to owners will reduce their 2021 California income tax liability, so long as the payment is made by the original due date of the passthrough entity’s 2021 California tax return.

We are still working with the FTB to confirm the answers to a number of other questions. We will continue to provide updates on those answers in upcoming issues of Spidell’s California Taxletter®.

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