As the June 15 mandatory prepayment deadline for the 2022 passthrough entity elective tax approaches, we want to point out some important considerations that should not be overlooked.
Minimum payment amount
Taxpayers who wish to make the passthrough entity elective tax election for 2022 must pay either the greater of 50% of the tax paid for the prior taxable year or $1,000. There are no exceptions to this requirement. Taxpayers who don’t pay this amount by June 15, 2022, will not be able to pay the tax for 2022.
Entities that did not elect to pay the tax in 2021 will pay $1,000 on June 15, 2022, to preserve the right to make the election for 2022.
Because there is no reasonable cause exception to satisfying the prepayment thresholds listed above, we highly recommend that taxpayers that paid the passthrough entity elective tax for the prior year add a “cushion” to the 50% minimum tax payment threshold, especially if those 2021 returns are still on extension.
An overpayment of the 2021 passthrough entity elective tax cannot be applied to the 2022 June 15 prepayment. Do not consider any overpayments when calculating June 15 payments.
The FTB has taken the position that for purposes of calculating the Other State Tax Credit (OSTC), California residents must reduce their California tax liability by any Passthrough Entity Elective Tax Credits. This significantly reduces the benefit of the OSTC for passthrough entity elective tax owners. We are hoping to see a legislative fix to this problem, but that is not likely to happen before June 15.
In the meantime, you will have to run the numbers to see if it still makes “cents” to have a passthrough entity pay the elective tax on behalf of your clients if the taxpayer will be claiming the OSTC. If your clients do not make a June 15 payment, they will lose the ability to elect to pay the passthrough entity elective tax and take the credit for 2022. If they make the payment, and there is ultimately no fix, they are not forced to make the election to pay the tax on their 2022 return. However, they will have to wait until the 2022 return is filed to request a refund of those June 15 payments.