AB 150: Passthrough Entity Elective Tax Update

AB 150: Passthrough Entity Elective Tax Update

As an update to our newsletter issued earlier this month, there has now been a bill signed by California Governor Gavin Newsom (Senate Bill 113) that updates and clarifies the Passthrough Entity Tax Election (PTE) for qualifying entities.  Below are a few of the key changes that affect those that make the PTE election.

Who can make the election?

Prior to the passage of this Bill, qualified participants (S-Corporations and partnerships) were not allowed to have any shareholders or partners that are partnerships. Further, they could not be part of a combined tax return filing or be a publicly traded partnership. Additionally, having a shareholder or partner that is a single-member LLC did not disqualify the entity from offering the election to other partners, but the single-member LLC was not allowed to make the PTE tax election for its share of net income.

Under Senate Bill 113, having shareholders or partners that are partnerships does not disqualify the entity from making the PTE tax election for the other partners, but the member taxed as a partnership is not allowed to participate in the PTE tax election.  The new bill also allows owners that are single-member LLCs to make the PTE tax election through their ownership in a partnership or S-Corporation.

Limitations to the Use of the PTE Payment

Previously the use of the PTE tax credit was limited, as it was not allowed to offset the California tentative minimum tax.  This caused a problem for many taxpayers.  Senate Bill 113 has repealed the tentative minimum tax limitation, thus making the full PTE tax payments eligible to offset California income tax. Any unused portion of the PTE tax credit can be carried forward for 5 years.

Please reach out to your DKC representative to discuss any questions and potential benefits of how this election may apply to your individual tax situation.