CA PTE Tax (SALT Workaround) & CA AMT

Technical topics regarding tax preparation.
#1
Wiles  
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If we do both the PTE tax return and the PTE owner's personal tax return, are we not able to manage the AMT issue and avoid creating a carryover credit?

For example:
* PTE pays $10,000 to CA
* PTE tax return shows $100,000 of profit. Therefore, max PTE amount is $9,300.
* The PTE owner's personal tax return shows total CA tax of $20,000 and CA TMT of $13,000. Therefore, they can only use $7,000 of the credit.

Prior to completing the PTE tax return, can we elect to only claim $7,000 of credit and request a refund of $3,000?

If you claim the credit can you choose something less than the 9.3%?
 

#2
JAD  
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All good questions. I don't think we have guidance yet, and I don't think we can presume to know the answers.
 

#3
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Prior to completing the PTE tax return, can we elect to only claim $7,000 of credit and request a refund of $3,000?


I thought the CA PTE could only make an irrevocable election to pay 9.3% of its net income or not($0 PTE). So in your example for $100K of net income PTE tax is $9300, so still have a credit carry forward of $2300.

PART 10.4. Small Business Relief Act [19900 - 19906] ( Part 10.4 added by Stats. 2021, Ch. 82, Sec. 15. )

RTC 19900. (a) (1) For taxable years beginning on or after January 1, 2021, and before January 1, 2026, a qualified entity doing business in this state, as defined in Section 23101, and that is required to file a return under Section 18633, 18633.5, or subdivision (a) of Section 18601, may elect to annually pay an elective tax according to or measured by its qualified net income, defined in paragraph (2), computed at the rate of 9.3 percent for the taxable year for which the election is made.
 

#4
Wiles  
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Thank you for the cite and analysis. I agree.

Follow up question, what if they only paid $5,000 by the payment due date (3/15/22)? When they file the tax return later (during extension period) can they still elect with the amount limited to just the $5,000?

Or do they have a balance due of $4,300 with penalties?
 

#5
JAD  
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Your follow up question gets to why I said we don't know yet. We have a law but no details on how to implement in the many different situations that will exist. You propose a situation that would get around the 9.3% in the law cited by Taxmaster. I will be interested in his response as he has been following this issue closely from the beginning.
 

#6
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A qualified entity can elect to pay the PTE tax annually on its original, timely filed return.

19900.(d) The election shall be irrevocable and shall be made on an original, timely filed return for the taxable year of the election in the form and manner as prescribed by the Franchise Tax Board.
 

#7
Wiles  
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Taxmaster, I do not understand what your post in #6 is addressing. Can you please elaborate?
 

#8
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Taxmaster, I do not understand what your post in #6 is addressing. Can you please elaborate?

what if they only paid $5,000 by the payment due date (3/15/22)? When they file the tax return later (during extension period) can they still elect with the amount limited to just the $5,000?


100% PTE due 3-15-22 with the return. No extensions.
 

#9
Wiles  
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I agree. No extension on the payment.

But the election is done on the tax return which can be extended

So what happens when the payment is less than the 9.3%?

Does that create a balance due?
Or does it cap the election to the amount paid back on 3/15?
 

#10
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So what happens when the payment is less than the 9.3%?



Failure to timely pay the entity-level tax ( 9.3% of bet income) for a given year(3-15-22 for 2021) disqualifies an entity from electing for such year.
 

#11
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19904. (a) The elective tax authorized by this part shall be due and payable as follows:

(1) For taxable years beginning on or after January 1, 2021, and before January 1, 2022, on or before the due date of the original return that the qualified entity is required to file pursuant to Part 10.2 (commencing with Section 18401) without regard to any extension of time for filing the return, for the taxable year of the election made pursuant to Section 19900.

(2) For each taxable year beginning on or after January 1, 2022, and before January 1, 2026, as follows:

(A) On or before June 15th of the taxable year of the election, an amount equal to, or greater than, either 50 percent of the elective tax paid the prior taxable year or one thousand dollars ($1,000), whichever is greater.

(B) On or before the due date of the original return that the qualified entity is required to file pursuant to Part 10.2 (commencing with Section 18401) without regard to any extension of time for filing the return for the taxable year of the election made pursuant to Section 19900, an amount equal to the amount of the elective tax under subdivision (a) of Section 19900, less the payment made on or before June 15th of the taxable year pursuant to subparagraph (A).

(b) For each taxable year beginning on or after January 1, 2022, and before January 1, 2026, if no payment is made as required in subparagraph (A) of paragraph (2) of subdivision (a) in the form and manner as prescribed by the Franchise Tax Board, the qualified entity may not make the election under Section 19900 for that taxable year.

(c) This part shall not change any filing requirements under Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001).

(d) (1) The Franchise Tax Board may adopt regulations that are necessary or appropriate to implement this part.

(2) The Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) shall not apply to any regulation, rule, guideline, or procedure prescribed by the Franchise Tax Board pursuant to this part.

I bolded the only thing I can find that would not allow the entity from making the election on the tax return due to missing the payment due date. This speaks to the payment due on 6/15. If that payment is not made then, the entity cannot make the election.

I can also parse the words in "if no payment is made". What if some payment is made?

I know we will all know more in a month or two -- hopefully. As of now, I am thinking I will be encouraging my clients to overpay this thing by 25% or 50%.
 

#12
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I know we will all know more in a month or two -- hopefully. As of now, I am thinking I will be encouraging my clients to overpay this thing by 25% or 50%.


Over pay or underpay? Very creative. Underpay PTE by 12-31-21 to the amount of the credit allowed by the the 540 AMT limitation to avoid the creddit carryover. When will FTB came out with their position on under and over estimates of PTE? Not a lot of time left in the year.
 

#13
Wiles  
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If the underpay idea works, we will be utilizing that in the later years of this to avoid creating an expiring credit carryover.

But, for now, overpay and do not lose your ability to make the election for 2021. And if Congress lifts the SALT limit in 2022, then this would be the only year we can do this.
 

#14
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I took Annette Nellen's Cal CPA class today. 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. She also discussed the PTE, stating of course that we need more information. She touched on the systems that other states have put into place, and mentioned one state where form instructions for just this item are over 30 pages long. She also said that she is surprised the IRS has allowed this, mentioning substance over form both in her presentation and in her materials.
 

#15
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I can't tell if the problems with this bill are deliberate or just an oversight but it would be so easy to fix:

1) Make applicable for AMT
2) Make refundable
 

#16
JAD  
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Looking at the handouts, one slide says this:

"Can investments be put into a PS? It will probably work in CA, but not sure about other states with PTE taxes."

I think there are two problems with this:

1. If the partnership is solely holding investments, then 721(b) would require gain recognition upon contribution.

2. Notice 2020-75 says "...the Internal Revenue Service (IRS) intend to issue proposed regulations to clarify that State and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss..."

Are we sure that taxes related to investment income may be deducted against that income?
 

#17
JAD  
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Now I'm watching the business webcast, and they have revisited this issue. They say that CA tax on portfolio income can be part of the PTE.

My question:

I understand your point re the specific language of AB 150, but overall we are limited by the concepts in Notice 2020-75. What is the impact of the "non-separately stated taxable income or loss" language in the Notice? If we are allowed to deduct tax on all types of income, then why say “non-separately stated”?

The answer:

I just re-read Notice 2020-75. The references to "non-separately stated taxable income or loss" refer to a tax imposed directly on the PTE which will be treated as an ordinary deduction. Thus, if the PTE elects the PTE tax it will be treated as an ordinary deduction. It also affirms that this deduction is not separately stated for the partner/S Corp shareholder. The PTE tax is assessed on all types of flow-through income in CA and the deduction is an ordinary deduction.
 

#18
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The PTE tax is assessed on all types of flow-through income in CA and the deduction is an ordinary deduction.


Wild isn't it. Have LLC rental with just an 8825 yet there is a CA PTE deduction on front of 1065. Seems to circumvent the passive loss rules.
 

#19
JAD  
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So the RRE is reported on line 2, but the PTE deduction is on line 1?

Yes, wild. I think allowing this was political. It doesn't make sense and is not consistent with normal taxation concepts.
 

#20
COGS  
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Please let their be a SALT limit change so this goes away. Will going to $80K result in the law ending 1/1/22? Could CA repeal it for 2021 if it goes to 80K this year.

My mind is spinning on this one.
 

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