Pass-through entity (PTE) election state tax rules

CA has a rule that says For taxable years beginning on or after January 1, 2022, and before January 1, 2026, the PTE may not make an election if the initial payment is not made by June 15.

Does anyone know if other states have similar rules that require the election be made during the year, rather than just being able to elect it on the tax return filed on or before the March 15 due date?

Not sure about other states, but I'm pretty sure CA has that rule because it makes it a binding tax that can be accrued for accrual basis businesses. Like for 2021, if the "tax" can be elected at tax time and paid then, it is not binding and cannot be accrued. If anyone paid it in 2022 for TY21 it could not be deducted for 2021 and would instead be deducted in 2022 (even for accrual basis). However, going forward, if you pay before June 15 then you are now irrevocably obligated to pay the tax and it is now able to be accrued for 2022 if the remaining balance is paid with the tax return.

I don't think CA was looking out for accrual basis taxpayers when they put their rule in place. IMHO.

You're probably right that it wasn't their primary reason. They probably were more interested in getting "their money" faster, but it seems to work out for accrual basis tax payers when you look at the IRS notice regarding deducting the tax workarounds.

Yes, other states have similar rules. They want you to pay early and in some cases, the payment can be the election. I've so far dealt with CA, NY, and MI.

AICPA has a good map. Check is out.

https://us.aicpa.org/content/dam/aicpa/ ... te-map.pdf

I'm just now having some time to look at all of the PTE state income tax rules, as NC has now passed the law allowing the PTE to pay the state tax as well.

In thinking about all of it and trying to figure things out, does anyone know how it will work? For example, let's begin with an accrual basis S Corp. Let's say they pay $15,000 in state ES in 2022 for a 12-31-22 year-end. In February 2023, when preparing the returns, the S Corp state tax liability is actually $20,000. Does the S Corp accrue the full $20,000 and is then responsible for paying the additional $5,000? Or is only $15,000 accrued and the shareholders are responsible for the remainder?

Now, assume sort of the opposite. S Corp paid $15,000 in ES, but the tax liability is only $10,000 when the tax return is prepared. How is the $5,000 overpayment handled on the books?

It is an entity level tax so it is all reconciled on the entity return and paid by the entity, not the shareholders (directly anyway). In CA at least, if underpaid, the entity owes the difference. If overpaid, the entity gets a refund.

The tax credit to the shareholders is their share of the total amount actually imposed on the entity, not what was paid/underpaid. This is similar to the foreign tax credit. You only get a credit for what was actually owed. i.e. You can't make a big over-payment that will get refunded later and claim a credit for all of it.

Proposed regulations are in the works. The IRS notice had a section that said amounts paid during the year are deducted for that year but did not specifically address anything related to accruing it. I would expect that the regulations will address this.

Not sure about other states, but I'm pretty sure CA has that rule because it makes it a binding tax that can be accrued for accrual basis businesses. Like for 2021, if the "tax" can be elected at tax time and paid then, it is not binding and cannot be accrued. If anyone paid it in 2022 for TY21 it could not be deducted for 2021 and would instead be deducted in 2022 (even for accrual basis). However, going forward, if you pay before June 15 then you are now irrevocably obligated to pay the tax and it is now able to be accrued for 2022 if the remaining balance is paid with the tax return.

I don't think that is correct. The payment by 6/15/22 only preserves your option to use the PTE strategy for 2022. The election is made on the 2022 return, filed in 2023. Until the election is made, the payment is refundable. If accrual concepts prevail, the payment is like a deposit and is not deductible until 2023. We will see what proposed regs say.

For NC, you also make the election on the tax return. Are most of you on this board holding off on advising your clients to make the ES through the corporation until we have more guidance?

Due to not really knowing how all of this works (and no clear guidance) and thinking at one time the feds would increase the amount of deductible taxes to a higher amount on Schedule A, I was not really considering advising this. Now, I'm thinking the increase at the federal level will not increase in 2022 so I need to be looking at this a little closer.

For NY, there was a March 15, 2022 opt in for the 2022 tax year.

2022 PASS-THROUGH ENTITY TAX
By March 15, 2022, pass-through entities that wish to elect to pay the 2022 PTET must:

File their election through their New York State Department of Taxation and Finance business services online account, and
Make their first 2022 PTET estimated tax payment through their business services online account.
Note that the remaining three PTET 2022 estimated tax payments are due June 15, September 15, and December 15.


But they just passed a law giving you to 9/15

This might be an awful lof of work for small $$$. I know in NY you need to file the form manually on their website. Screw that. I am having the client do it and crossing my fingers they do it right

This might be an awful lof of work for small $$$. I know in NY you need to file the form manually on their website. Screw that. I am having the client do it and crossing my fingers they do it right

Berkshire, I'm thinking the same thing! Think I may only look at this for my really high income clients.

Still not comfortable doing it until further guidance comes out. A lot of the NC guidance states "the Department will provide guidance on how to ... when the Department publishes the instructions for the applicable 2022 NC Tax Return". To me, that will be a little too late!

My thought is to not have the NC PTE pay tax estimates in 2022 since they won't be charged interest, then have most of them make the election and pay the NC tax with the return. I'm confident we'll be able to accrue the tax just like we do for accrual C corps.

I've already given a lot of shareholders NC tax estimates based on their 2021 return and I'm not planning to circle back to most of them before tax planning in Nov / Dec.

Tax Me Up, my thoughts are about like yours. I don't want to try to go back and change their personal NC estimated payments. I'm also thinking that we should be able to accrue the taxes at year-end for accrual basis entities, however the cash basis ones will probably have to have paid by year-end for the deduction.

With regards to the CA 2022 6/15 1st payment election due date - does anyone know what happens if say, for instance, a pass-through entity has not completed its 2021 return by 6/15/22 and it pays the $1,000 by 6/15/22, but when it later files its 2021 tax return 50% of the tax is higher than 1,000? Will that condition disqualify the entity from making the PTE election for 2022? Or will the 2022 election still be valid but the entity will be subject to underpayment penalty on the excess of 50% of 2021 PTE over the 1,000 paid?

Per Spidell, the prepayment must be at least the greater of 50% of the prior year tax or $1,000. Failure to satisfy the prepayment requirement in full eliminates the possibility to make the election for 2022. There are no exceptions.

Have we/anyone clarified if these state tax payments at the PTE level reduce taxable income Federal? I just read through the NC law and it is not clear. So if we have 100K S corp income, we pay 5K in NC ES payments at corp level. I believe we have 100K taxable income FED and state we back out the 100K as it was taxed at the entity level.

The State tax is not on taxpayers ScheduleA but i dont believe we deduct it from FED income on the s Corp return.

If the above is true, the benefit is marginal at best.

Anyone have thoughts on this?

It is an entity level tax so it is all reconciled on the entity return and paid by the entity, not the shareholders (directly anyway). In CA at least, if underpaid, the entity owes the difference. If overpaid, the entity gets a refund.

The tax credit to the shareholders is their share of the total amount actually imposed on the entity, not what was paid/underpaid. This is similar to the foreign tax credit. You only get a credit for what was actually owed. i.e. You can't make a big over-payment that will get refunded later and claim a credit for all of it.

Proposed regulations are in the works. The IRS notice had a section that said amounts paid during the year are deducted for that year but did not specifically address anything related to accruing it. I would expect that the regulations will address this.

Are you saying you have seen IRS proposals allowing for the deduction of these payments? As if it were an C Corp?

That I’d like to see ….. Ive read interpretations by firms, but nothing from IRS yet.

IRS Notice 2020-75

This notice announces that the Department of the Treasury (Treasury Department)
and 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 for the
taxable year of payment.

IRS Notice 2020-75

This notice announces that the Department of the Treasury (Treasury Department)
and 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 for the
taxable year of payment.

OK….. Thank You.

Per Spidell, the prepayment must be at least the greater of 50% of the prior year tax or $1,000. Failure to satisfy the prepayment requirement in full eliminates the possibility to make the election for 2022. There are no exceptions.

Just got a call from a CA client stating that they did not pay their 6-15-22 PTE estimated payment. Of course I told him no less than four times prior to 6-10-22 that this payment absolutely must be paid by 6-15-22...silly me for not calling on 6-15 to check again for the fifth time. Seems like there will be no relief available for 2022 PTE for CA, correct? At this point I just need to send him personal ES payment coupons as the PTE will be off the table.