CA PTE Tax (SALT Workaround) & CA AMT

Will going to $80K result in the law ending 1/1/22?

No still good for 2021 CA. Must be a full repeal of SALT.

This, just now on another forum, from a very knowledgeable practitioner:

There has been a focus on paying the tax in 2021 to get the federal benefit, but I don't think that is enough for California's PTE because you can only make the election on a timely filed return. If a payment is made but no election is made, then no tax is owed. It looks like a payment in 2021 is really just a "deposit" so not deductible on the federal return until 2022 when (if) the election is made. I have raised this in the update presentations and with the AICPA to consider in any comments it sends to IRS about the regs we are still waiting for that were promised in Notice 2020-75, and raised it with the FTB on whether there is any way to elect early but they noted the law says the only way to elect is on a timely filed return.

It looks like a payment in 2021 is really just a "deposit" so not deductible on the federal return until 2022 when (if) the election is made.

I am missing the why it would not be Fed deductible for 2021. For 2022 AB150 requires a prepayment (deposit) on 6-15-22 of 50% prior years PTE. So whats different if prepayment is made on 12-31-21 for 2021?

She identified the concern that the entity is not bound until it makes the election on the tax return, which is filed in 2022. The entity can make the payment but is not bound. I guess the entity could make the payment, not elect, and obtain a refund.

FTB Dec newsletter describes the payment as an "elective tax payment"

I'm not arguing with you. I have simply provided the thoughts of another practitioner. But disregard her comments with careful thought. She is brilliant and very well connected within the different organizations. As per the quote, she has raised the issue with the AICPA. I'm sure they take her seriously. We will see how this unfolds.

I'm not arguing with you. I have simply provided the thoughts of another practitioner. But disregard her comments with careful thought. She is brilliant and very well connected within the different organizations. As per the quote, she has raised the issue with the AICPA. I'm sure they take her seriously. We will see how this unfolds.

Thank you for providing experts interesting take on 2021 deduction. Please continue. I was just trying to understand her comment enough to see if I wanted to get other expert opinions. 12-31-21 is comming up fast. No IRS guidance. Proceed with caution.

From JAD's post # 14 "Gregory Kling spoke about the PTE and showed that if a taxpayer files in more than one state, the taxpayer can wind up owing more in total tax due to the impact of the election on the credit for taxes paid to another state"

When I read about this through the links provided under another thread, this was one of my first questions. I have one client, living and working in Hawaii, whose S corp is registered to do business in California only because she has one project she is working on that she has just finished. So we will very likely cancel her registration going forward. She will have roughly $100,000 of income from California this year on her personal side. If the Corp pays this PTE as I'm understanding it, then I don't see how she would get a credit on her Hawaii return for tax paid to another state. Overall, it doesn't look like a good idea for this type of situation.

I have heard that some folks or mimicking this in the 2020 software. If anyone is having success, what credit field are you using in 2020 to mimic the pass through entity credit? Thank you!

This is what I am doing, setting up a "dummy" client in our 2020 software (UltraTax) in order to calculate the CA tax and the TMT effect. You can mimic any credit as long as it appears on CA Schedule P, Part II, Section A2 line 6. In my software, I chose the first credit listed on the input screen (donated agricultural products transportation).

I have heard that some folks or mimicking this in the 2020 software. If anyone is having success, what credit field are you using in 2020 to mimic the pass through entity credit? Thank you!

Better to use 2021 tax sw.
Latest Proseries update has CA Schedule P done correctly if you include the gross receipts on CA Schedule K-1( line 17 d for 100-S). That is it calculates the $1M gross receipts test and if less puts in the AMTI exclusion on Schedule P line 17 of the net business income(e.g. Box 1 of CA K-1). Also has MS 1477 2020 c/o ( code 240) and MS 2021 ( code 241) credits along with PTE credit(code 242). Drake no 2021 CA sw until Jan 2022.

Sorry for not being the sharpest tool in the shed on this. Is it safe to say that if gross receipts are less than $1 Million, we will generally be OK with maybe a small carryover because of the non-refundability of the credit? Next, let's say they are over a million on end up with a large credit carry over. Should I really be concerned? For example, lets say they pay $150K and end up with a $70K credit carry over. They are getting a 37% of $150K deduction that they are not getting now. So $55K in actual tax savings. Then, 2022 they can use that credit in place of a tax estimate and just not do the Pass Through Entity Tax deal for the 2022 year and we see what happens.

I agree with your reasoning, COGS. I would still claim in 2022 and possibly 2023. Keep an eye on how much you are tacking onto the 5-year carryover. I would want to front end this in case they eliminate SALT completely.

Not sure what they taxpayer uses in 2022 first. Will they use the 2021 carryover or the 2022 credit?

I have a client with $20M gain on sale of S-Corp assets. Unfortunately, he will end up with a $1.1M credit carryover. He will only utilize about $80K of that each year for the next 5 years. He will lose $700K of the credit and get about $600K of Fed tax savings. We have our fingers crossed the CA legislature will deal with the TMT issue.

PTE is a choice, right? So taxpayers are not obligated to apply it. I'm asking because my client lives in, is a resident of and files returns in Hawaii, they are completing one project in California and will cancel their registration in Cali. From what I'm reading, she and her S corp are not really candidates for using it.

For example, lets say they pay $150K and end up with a $70K credit carry over. They are getting a 37% of $150K deduction that they are not getting now. So $55K in actual tax savings.

What about QBI. Going to lose 20% QBI deduction on the reduced net business income so its really 37%x80%= 29.6% or $44.4K potential tax savings.

Yes. The QBI definitely factors into it. The possibility of an increased SALT limitation would make the PTE deduction less beneficial than the Sch A deduction.

I have clients playing it both ways and we will figure it out in the summer.

I am reposting this issue/question that I saw on the Spidell Message Board today. Anybody have any insights on this?

https://www.caltax.com/forums/topic/ab-150-5/

Everyone is assuming any unused credit limited by TMT is available for the 5 year carryover. As the statute is written I’m not so sure about that.

The statute allows carryover for any credit in excess of “net tax” as defined, which appears to not include any consideration for TMT. So if you have a credit of 100, regular tax of 120 and TMT of say 80, you get benefit up to the regular/TMT spread of 40, but does the 60 carry over? The statute says you get a carryover only if the credit exceeds “net tax” and net tax as defined appears to be basically regular tax with no regard for TMT. If this is correct, then in this example the 100 credit does not exceed the 120 net tax, so there is no carryover. The credit reduces net tax fully to 20, it’s below TMT so you pay TMT, and the unused portion is lost. You would have to apply tax benefit theory to take the carryover. I don’t read Cal law very often, maybe I’m missing something here.

From Spidell:

Governor proposes major retroactive tax relief (01-11-22)
As part of his proposed budget, Governor Newsom is advocating for significant tax relief, including, but not limited to:
• Expanding the Passthrough Entity Elective Tax Credit by eliminating the tentative minimum tax limitation and allowing disregarded entities, including single-member LLCs, to claim the credit. The Governor is requesting that this be enacted by March 15, 2022

Anyone else sick of retroactive law changes? These people should have to prepare returns for one season. One friend of mine insists that they should all have to hand prepare their returns.

Uggh. I think if it looks promising it will pass, I will have potential clients pay PTE by 3-15-22 and put them on extension to 9-15-22 along with 540 to 10-15-22 yo give me some time.