You may think it’s crazy that I’m suggesting you pay an optional tax, but once you understand the tax benefits, you won’t think this is a dumb idea. The pass-through entity tax (PTET) is a valuable tax credit many high-income California business owners need to get. It helps turn non-deductible state taxes you must pay each year into valuable tax savings.
If you only speak to your tax person once a year when filing your taxes, you will likely miss out on substantial tax savings. The more you make, the larger the value of the tax savings could be. The deadline to elect to take the PTET tax deduction in California for 2023 is June 15, 2022. This is why it’s important to have a proactive and tax-planning-focused financial planner in your corner, helping you make smarter financial moves throughout the year.
You may also hear the PTET elective tax called a SALT CAP workaround.
What Are The Benefits Of The PTET?
The Trump Tax Plan capped tax deductions for state and local taxes (SALT) at just $10,000 yearly, whether you file as single or married. If you own a home in California, your property taxes are likely close to or higher than that amount. This is before factoring in your state income taxes, which we know you incur to afford your house.
With a PTET payment, you essentially have your business pay your state income taxes. This helps turn those costs into fully deductible business expenses.
This strategy is also great for taxpayers who take the standard deduction. If this is how you file your personal return, you can get a new business deduction for SALT taxes paid via the PTE elective tax.
Who Qualifies For A PTET?
You need to run your business as a partnership or S Corporation to take advantage of the pass-through entity tax in California. If you work at a publicly traded partnership, you will not be eligible for the PTET.
Related: How Much Will A Cash Balance Plan lower you taxes?
How To File Your PTE Election
Your annual PTE election is made on an original, timely filed tax return. Once the filing election is made, it is irrevocable for that year and is binding on all partners, shareholders, and pass-through entity members.
Tax Years 2022 To 2025
For tax years beginning on or after January 1, 2022, and before January 1, 2026, the PTE election must be made when the tax return for the taxable year is filed, and the PTE must make an initial payment by June 15 during the tax year. The initial payment CANNOT, I repeat CANNOT, be made when filing your taxes after the tax year has ended.
When To Pay The PTE Tax
Your tax payments must be within specific time frames.
2022 To 2025 Taxable Years
Use the following table from the Franchise Tax Board:
On or before June 15, during the taxable year of the election
Pay $1,000 or 50% of the elective tax paid for the prior taxable year, whichever is greater.
On or before the due date of the original return without regard to extensions
Pay the remaining amount.
How To Make Your PTE Tax Payments
Tax payments aren’t much fun, but you still want to make them correctly. All PTE elective tax payments can be made by using the free Web Pay application, accessed through FTB’s website, or using the Pass-Through Entity Elective Tax Payment Voucher (FTB 3893). Do not try and combine your PTE payments with other tax payments. Once made, your PTE payments will remain coded as a PTE elective tax payment until your business tax return is eventually filed.
Related: 2023 Tax Deadline For Californians
How To Claim Your PTE Tax Credit
Qualified taxpayers can claim their PTE credit on their personal tax returns.
Reminder, you must elect and make the first payment toward your California pass-through entity tax by June 15, 2023. If you believe you qualify to benefit from this tax strategy and your tax person or financial advisor is not up to the task of guiding you through this process, it may be time to upgrade to financial professionals who meet your current personal and business financial planning and tax-planning needs.
Related: Tax Benefits Of Working With Your Spouse