Idaho resident with CA PTE

I have an Idaho resident who has PTE payments from CA entities. The program I'm using is Lacerte. The Lacerte program is taking the net tax due after the PTE payments to calculate the credit. They are getting a large balance due on the ID return because of the PTEs paid for CA. This is new because in the past they received a full credit for taxes paid to another state.

Has anyone run into this and is there a workaround or should I be recommending to the client that they not elect PTE in the future?

Any ID preparers that may be able to help?

I haven't worked through this, but you thought that not only would the client be allowed the fed deduction for the amount of California PTE, but the California PTE would also be an OSTC? I'm not surprised. Kind of seems like double dipping... no?

Just curious - Are you adding back the amount of CA PTE deducted for fed to calculate Idaho income?

Yes I added back the PTE in the ID so that the income is the same as CA income but Lacerte is still taking the net tax. I can override to gross CA tax before the PTE but I don't know if that is the correct way to do it.

Yes I added back the PTE in the ID so that the income is the same as CA income but Lacerte is still taking the net tax. I can override to gross CA tax before the PTE but I don't know if that is the correct way to do it.

Right. It's really interesting. I did the same in CCH Axcess and got the same result as you. Line 6 of the of section C of Schedule 39R pulls into the software the tax net of any income tax credit. The instructions specifically address composite tax payments and how you should include the tax, but does not mention PTE. It seems the software is following Idaho's instructions.

FWIW, if the states were switched and California was the resident state, the software treats it as expected.

Some states work the way OP described.
We are all learning the hard way this year.

Some states work the way OP described.
We are all learning the hard way this year.

I guess so; however, I would not be surprised if some correct it in future years. This seems like an unintended consequence - why would Idaho essentially punish the taxpayer for participating in another state's PTE?

So for grins I ran the return as if no PTE was taken for CA. Federal, CA & ID all have the same income. The total tax wend down. Although they benefited from the deduction for federal purposes, they are more than getting zinged for ID purposes when using the PTE for CA but not for ID.

I don't know if that was the original intent or will ID correct this. Thanks IDunnoITDepends, glad you got the same results I did (although I wish you hadn't!). Was hoping an ID preparer would answer or someone in ID might respond that would know who I could contact at the state level to see if they've run into this.

Isn't ID getting more money now? Why would they correct it and send "their" tax money to CA. It's bad enough ID has to put up with all those transports.

Isn't ID getting more money now? Why would they correct it and send "their" tax money to CA. It's bad enough ID has to put up with all those transports.

CA will get the same amount of tax regardless, this is just punishing Idaho residents who opt-in to PTET for their other state source income. They would be much better off if they didn't opt-in to PTE, and just paid the tax the old way.

So next year they do not opt in to CA PTET.

Yes IDunnoItDepends & sjrcpa, I plan on suggesting they do not opt in to the CA PTET. Unfortunately I didn't know about this until after the fact...

I wonder how much wiggle room there is in Idaho's (or any other state's) OSTC guidelines to use the CA tax *BEFORE* the PTE credit? Or claim that the election by the taxpayer to participate and payment made by the entity is the same as a tax that was imposed on the taxpayer by the other state?

It looks like Arizona let's you use the State tax BEFORE the PTE credit.

AZ Form 309, Part 2, Line 12 Instructions:

If you received distributed income from a partnership and/or S Corporation (the Entity) reported on Schedule K-1 or K-1(NR) and the Entity elected to pay Entity-Level Income Tax on your pro-rata share of the distributed income, enter the total taxes paid by the Entity on your behalf. This tax amount is limited to the amount actually paid by the Entity or the amount of the other state’s individual income tax had the Entity not elected to pay the tax at the entity level, whichever is less.

Read Idaho section 63-3026B, which is the section for the Idaho PTE tax. Then look at (8)(b) which states "Each individual who is a member and is subject to the tax under section 63-3024, Idaho Code, as a resident or a part-year resident of this state is entitled to a credit against such tax for the individual's direct and indirect pro rata share of taxes paid to another state of the United States or the District of Columbia, on income of any partnership or S corporation of which the individual is a member that is derived therefrom, provided the taxes paid to another state of the United States or the District of Columbia results from a tax that the state tax commission determines is substantially similar to the tax imposed under this section. Any such credit will be calculated in the manner prescribed by the state tax commission and shall be consistent with the provisions of
section 63-3029, Idaho Code.""

It says "direct or indirect." I would also think the CA PTE tax is substantially similar to the Idaho PTE tax and should be allowed the other state tax credit.
I would increase the credit allowed, attach the CA return with a copy of the 3804 from CA and take a position that the tax imposed on the individual includes not only the net tax paid directly on the 540 but also the tax paid indirectly, on behalf of the individual, on the 3804 which is substantially similar to Idaho's PTE tax.

Excellent, MilesR!

FWIW, I have a CT resident with a CA PTE payment. I found no relief for them in the CT OSTC instructions nor regulations.

I then found a Spidell article that listed each state's version of the PTE. This article includes section called "Owner Relief" under CT that states:

Residents and part-year residents may claim an Other State Tax Credit for PEET paid to another state under a “substantially similar” PEET

I searched the CT tax code for their PTE rules and confirmed that is true. Conn. Gen. Stat. §12-699(g)(1)(B)

Each person that is subject to the tax imposed under chapter 229 as a resident or a part-year resident of this state and is a member of an affected business entity shall also be entitled to a credit against the tax imposed under said chapter, other than the tax imposed under section 12-707, for such person's direct and indirect pro rata share of taxes paid to another state of the United States or the District of Columbia, on income of any affected business entity of which such person is a member that is derived therefrom, provided the taxes paid to another state of the United States or the District of Columbia results from a tax that the commissioner determines is substantially similar to the tax imposed under this section. Any such credit shall be calculated in the manner prescribed by the commissioner, which shall be consistent with the provisions of section 12-704.

The moral of the story is don't assume your software knows how to calculate the OSTC when there is a PTE involved. If you don't find what you need in the OSTC rules then also look at that state's PTE rules.