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Under California’s pass-through entity tax law, for taxable years 2021 through 2025, a qualifying S corporation, partnership, or LLC taxed as a partnership or S corporation can make an election to pay a pass-through entity elective tax equal to 9.3% of its qualified net income. A single member LLC (SMLLC) treated as a disregarded entity is not eligible to make the election.
The first PTE installment payment is due June 15th of each year, and is equal to the greater of:
- 50% of the prior year’s PTE elective tax paid, or
- $1,000
We recommend that taxpayers add a “cushion” to ensure that they do not underpay the tax. If the qualifying entity did not participate in the program for the prior tax year, but the owners of the pass-through entity are fairly certain they will want to participate in the PTE program for the current year, at least $1,000 must be paid by June 15 for each participating entity.
Because June 15 falls on a Saturday this year, the prepayment deadline is actually June 17, 2024, for the 2024 tax year. If the entity did not pay the tax in the prior year, it only must pay $1,000 by June 17, 2024, to qualify to make the election for 2024.
As a reminder, this tax is deductible on the pass-through entity’s federal return and therefore decreases the federal net income passed through on the owners’ K-1. California also allows the entity’s consenting individual, estate, trust, and certain SMLLC owners to claim a credit on their California return of up to 100% of the tax paid on their behalf. Any PTE tax credit that exceeds a taxpayer's California personal income tax for the current year can be carried forward for up to five years.
California’s passthrough entity tax is different than many other states’ in that although the election is made at the entity level, each shareholder/partner/member may or may not consent to have the entity pay the tax on their share of the entity’s income.
The second PTE elective tax installment is due by the entity’s tax return due date (without extensions), which for most partnerships, LLCs and S corporations will be March 15, 2025. However, we recommend pass-through entities perform late-year tax planning to estimate and make the second installment payment by December 2024 in order to accelerate the federal deduction in the 2024 tax year.
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