Passthrough entity tax FAQs released by FTB - Spidell

Passthrough entity tax FAQs released by FTB


The FTB posted new FAQs addressing California’s passthrough entity tax enacted by AB 150. There is not much new information included in these FAQs; however, the FTB did make the following clarifications:

  • A passthrough entity may make the election even if it has a disregarded entity as a member, such as an SMLLC. However, the SMLLC is not considered a “qualified taxpayer” and therefore is not eligible to claim a passthrough entity tax credit; and
    • The qualified net income subject to the passthrough entity tax is the sum of the pro rata share, or distributive share, of income subject to California personal income tax of each consenting partner, member, or shareholder. Note: The FTB has confirmed that because guaranteed payments are not considered distributive share of income under federal and California law, they are not counted in “qualified net income.”

The FTB anticipates releasing the new passthrough entity tax voucher before December 2021. That voucher will provide instructions on how to make the 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.

As we previously reported, for taxpayers who must make payments now, they 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. On these Pending Audit Tax Deposit Vouchers, enter the tax year as “2021” and check the “Other” box when making the payment.

We continue to work with the FTB on the answers to the more complex questions regarding this new tax, and we will report back to you as that information is released. We will have a detailed discussion at our 2021–2022 Federal and California Tax Update Webinars.

The FAQs are available at:

www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/help.html