California passthrough entities (PTEs) that made the initial June 15 passthrough entity elective tax payment can take advantage of increased federal tax savings by paying the remainder of the 2022 tax dues by Dec. 31, 2022.
The second PTE elective tax installment is not due until the entity’s tax return due date, which for most partnerships, LLCs and S corps is on March 15, 2023 — without regard to extensions. However, an early PTE tax payoff will allow the full amount of tax paid to be deducted from the taxpayer’s 2022 return.
This election, enacted under California Assembly Bill 150 in 2021, reduces an eligible owner’s federal tax liability. These benefits were modified and expanded under Senate Bill 113 early this year.
The law is a workaround allowing for the deduction of state and local taxes over the federal $10,000 deduction limitation. Qualifying PTEs may now annually elect to pay a 9.3% entity-level state tax on qualified net income for tax years starting on or after Jan. 1, 2021 and before Jan. 1, 2026. PTEs can now shift the federal deduction of state and local income tax payments to their businesses, as state tax payments are not eligible for deduction on an owner’s personal income tax return.
To qualify to make this tax election for the 2022 tax year, the entity must have paid a prepayment of the greater of $1,000 or 50% of the prior year’s PTE tax due for the 2021 tax year on or prior to June 15.
If you made the passthrough entity elective tax 2022 prepayment, contact our office to determine the full benefits if you make your final payment before year’s end and trigger a federal tax deduction.
