AB 150: Passthrough Entity Elective Tax Update

Senate Bill 113 provides clarifications to the qualifications and benefits of the Passthrough Entity Tax Election (PTE) program.

How to Make the Election

For tax years 2022 through 2025, the entity must make an initial estimated tax payment due by June 15th of the respective tax year.  The amount due is the greater of 50% of the elective tax paid for the prior year or $1,000. The remaining amount is due by the entity’s original tax filing deadline of March 15th in the following year. If the June prepayment is underpaid, the taxpayer will be ineligible to make the election for that taxable year.

If a passthrough entity did not exist on June 15th, the prepayment is not required to be made for its initial year. It will be required to pay the full amount of tax owed for the short year return by the due date of the tax return.

Other Changes Brought on by SB113

In addition to the clarifying rules above, SB113 provides for a few more favorable changes to AB150 including:

  • A passthrough entity with a partnership as a member is now allowed to participate in the PTE credit program retroactive to the 2021 tax year. Previously, this was not allowed under AB150.
  • A single-member LLC that is a member of a passthrough entity may participate in the PTE credit program. The PTE credit will be claimed by the owner of the single-member LLC on their personal tax return.  This change was also made retroactive for 2021, but the state of California will not accept amended returns for implementation of this change.
  • Guaranteed payments to partners, which were originally disallowed under AB150, are now included as qualified income for the passthrough entity credit.

One other detail to be aware of is if the taxpayer overpays their passthrough entity tax for the year, they will be required to refund the difference and include it as Federal taxable income in the year received.

More than one year into this program, many of the rules and interpretations are still evolving.  We will continue to keep you updated of further changes.

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

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