2022-19: Multistate taxpayers should hold off on June 15 passthrough entity elective tax prepayment

Beginning with the 2022 taxable year, SB 113 (Ch. 22-3) changed the California tax credit ordering rules so that the California Passthrough Entity Elective Tax Credit is claimed after the Other State Tax Credit (OSTC), rather than before the OSTC.

Spidell interpreted this change as addressing the issue many multistate taxpayers are having where the Passthrough Entity Elective Tax Credit essentially wipes out any benefit of claiming the Other State Tax Credit. This occurs because the Passthrough Entity Elective Tax Credit reduces the California tax liability used to compute the OSTC, which reduces the “double taxed” income for which the OSTC may be claimed.

The FTB is taking the position that changing the ordering rule does not impact the “calculation” of the OSTC. The FTB has stated that the benefit of changing the credit ordering rules is that it enables taxpayers to fully utilize the OSTCs to which they are entitled. OSTCs may only be used for the year that the taxes are paid and unused OSTCs may not be carried over, but Passthrough Entity Elective Tax Credits can be carried forward to the following five tax years. According to the FTB, placing the Passthrough Entity Elective Tax Credits after OSTCs allows for more OSTCs to be used in the only tax year that they are available.

However, if changing the ordering rules does not impact the calculation of the OSTC, there is little or no benefit provided to multistate taxpayers because they will have no OSTC or only a limited OSTC credit to claim.

We are working with the FTB on this issue, but at this point we recommend that multistate taxpayers hold off on making their June 15 payment until this issue is resolved. We will send another Flash E-mail once we have a final resolution.

For more details on the Passthrough Entity Elective Tax Credit and the OSTC, sign up for our 2022 Post-Tax Season Update and Review webinar. Click here for more information.

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