To PTE or Not to PTE — That is the Question

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And it Must be Answered by March 15

California insurance entities taxed as either S-corporations or partnerships face an important deadline on March 15 – whether to elect pass-through entity (PTE) status for 2021 tax purposes.

Do not miss this March 15 deadline, as it will determine whether you are able to take advantage of AB 150, California’s new “SALT workaround” bill, for the 2021 tax year.

California is one of 22 states to enact an elective pass-through entity tax as a workaround to the $10,000 deduction limit contained in the Tax Cuts and Jobs Act of 2017 (TCJA). The IRS has approved of these workaround measures but has yet to issue implementing regulations clarifying the treatment of taxes on both the entities’ and owners’ returns.

Under AB 150, a qualified partnership or S corporation must make an annual election to pay an elective tax at a flat rate of 9.3% of the qualified net income for the taxable year. The election is irrevocable for the tax year for which it’s made, and all members of a PTE are bound by the election.

Estimated PTE Tax Payments Required

Along with making the election, you must make estimated tax payments of the PTE tax on or before the following dates:

  • For the 2021 tax year, the elective payment is due on or before March 15.
  • For tax years 2022 through 2025, either 50% of the elective tax payment or $1,000 (whichever is greater) is due on or before June 15 of the applicable year. So, for the 2022 tax year, the estimated payment must be made on or before June 15, 2022.
  • Failure to make these estimated PTE tax payments for the 2022 through 2025 tax years will preclude a qualified entity from making the PTE election.

March 15 is just days away, so make this election and pay the estimated PTE tax now for the 2021 tax year if you intend to take advantage of AB 150.