California—like most states—enacted legislation to offset the impact of the $10,000 deduction limitation on pass-through entities (PTEs) by the Tax Cuts and Jobs Act of 2017 (TCJA). California requires qualified entities to both make an annual election and their first payment by June 15th to secure their offsetting credit.
California legislators saw that the TCJA’s federal deduction limitation impeded business growth in their state and amended their Revenue and Taxation Code with the passage of Senate Bill 851. Arizona and New Mexico passed similar legislation.
California PTE Taxpayer Credit Qualifications
Through December 31, 2025, qualified pass-through entities (PTEs) in California can make an annual election to pay an entity level state tax on income. Those taxpayers receive a credit for their share of the entity level tax, reducing their California personal income tax.
To be eligible, an entity classified as a partnership or S corporation must not be a publicly traded partnership or an entity permitted or required to be in a combined reporting group. A qualified taxpayer is a partner, member or shareholder of an electing qualified entity that is an individual, fiduciary, or trust subject to California personal income tax or a disregarded single member LLC that is owned by an individual, fiduciary, estate, or trust subject to California personal income tax.
A qualified taxpayer must consent to have their pro rata or distributive share and guaranteed payments included in the qualified net income of the electing qualified PTE.
California PTE Taxpayer Credit Process
To participate in the elective PTE credit program, an election needs to be made annually on an original, timely filed tax return and the PTE must make an initial payment by June 15th. In 2024 the due date will be June 17th due to the 15th falling on a Saturday.
Note: The California state and Federal tax filing and payment extension granted to San Diego flood victims earlier this year remains on the June 17th due date.
Once made, the election is irrevocable for that year and is binding on all partners, shareholders and members of the PTE. The PTE elective tax payment cannot be combined with the entity’s other tax payments.
Claiming the California PTE Taxpayer Credit
Qualified taxpayers can claim the tax credit on their personal tax returns. For the 2023 and 2024 tax years, taxpayers can claim the tax credit by filing the PTE elective payment voucher form FTB 3893.
Unused credits can be carried forward for up to 5 years. Taxpayers must increase the “net tax payable” by the amount of the PTE credit that reduced net tax before application of the other state tax credit (OSTC) in the same taxable year.
Streamlining the Process
If you would like assistance in better understanding the California PTE regulations or preparing your tax returns, the State and Local Tax (SALT) experts at REDW work with individuals and entities in all states and are ready to make the process easier for you.
