We’ve received many questions from tax professionals asking what exactly is included in a passthrough entity’s qualified net income for purposes of computing California’s passthrough entity elective tax. The tax is equal to 9.3% of the entity’s qualified net income.
Today, the FTB has stated that the pro rata/distributive share of income can generally be computed:
- For S corporation shareholders, by taking the sum of lines 1–10 minus lines 11 and 12 from Schedule K-1 (100S); and
- For partners, by taking sum of lines 1–3 and lines 5–11 minus lines 12 and 13 from Schedule K-1 (565/568).
In general terms, this means the partner’s/shareholder’s share of the entity’s rental income, interest income, dividends, royalties, and capital and IRC §1231 gains are included, less IRC §179 deductions, charitable contributions, and investment interest expense. Guaranteed payments are not included.