june 15

Richard A. Huffman, CPA, MST

Tax Partner

 

The June 15 deadline is approaching for the mandatory prepayment of the 2022 California passthrough entity elective tax workaround deposit. Important details to consider are as follows:

Benefit

By electing to pay the taxpayers California tax at the entity level, the federal itemized deduction state and local $10,000 cap is circumvented thus allowing additional federal tax deductions for state taxes paid.  However, the California law has many requirements and nuances that must be followed and considered to make sure the taxpayer will benefit from the entity tax election.

Required minimum payment amount

In order to hold your spot to elect into the 2022 California passthrough entity elective tax workaround (CA PTE), the taxpayer is required to deposit the greater of 50% of the election tax for the prior taxable year or $1,000 by June 15, 2022.

If the June 15 payment date and/or amount is missed, the entity will be unable to qualify for the 2022 election.  The prepayment is a deposit and can be refunded when the entity files its 2022 tax returns if it is later determined that the 2022 election is not beneficial.

For entities who elected the 2021 CA PTE and have not finalized their 2021 tax returns and/or financial statements it is recommended that the 2022 50% minimum tax payment required is increased by a buffer amount in order to make sure the election is not lost.

Entities that did not elect the 2021 CA PTE will only need to deposit $1,000 by June 15 in order to maintain the right to the election in 2022.

2021 overpayments

The 2021 passthrough entity elective tax overpayments cannot be applied towards the 2022 June 15 prepayment and should not be considered when calculating the June 15 deposit amount.

Other State Tax Credit

California residents must reduce their CA tax liability by any Passthrough Entity Elective Tax Credits for the purposes of calculating the Other State Tax Credit (OSTC) according to the latest developments from the California Franchise Tax Board. This reduces the benefit of the OSTC by a significant amount for the passthrough entity elective tax owners.

We are awaiting additional guidance to determine if there will be a fix.

Conclusion

We strongly advise you consult with a tax professional to assist with the calculation and potential tax benefit of the 2022 CA PTE to determine if you should deposit the required amounts by the June 15, 2022 deadline.

Please contact your tax advisor at WFY to discuss additional details regarding the CA PTE.  Click here to contact a WFY tax advisor.