The FTB will continue to apply nonresident withholding after the Passthrough Entity Elective Tax Credit in post-2021 tax years. SB 113 (Ch. 22-3) changed the credit ordering rule so that the Passthrough Entity Elective Tax Credit is applied after the Other State Tax Credit. Based on R&TC §17039(b), Spidell, as well as other tax commentators, interpreted this change to mean that the Passthrough Entity Elective Tax Credit would also be applied after nonresident withholding.
However, the FTB has stated that the reference in R&TC §17039(b) has been incorrect since 2001 and they will be pursuing a technical correction in the next legislative session. In the interim, the FTB will continue to apply nonresident withholding on Line 83 of the Form 540NR, after the Passthrough Entity Elective Tax Credit. This is welcome relief to nonresident taxpayers who had nonresident withholding and will be claiming the Passthrough Entity Elective Tax Credit, as they will now be able to claim the credit against their tax liability prior to having the tax liability reduced by the amount of nonresident withholding.
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