In 2021, California enacted an elective pass-through entity tax (PTET) allowing both nonresident and resident partners or shareholders of qualified entities to get the benefit of deducting state and local taxes in excess of the current $10,000 limitation for federal income tax purposes. Partners and shareholders of qualified entities may claim a nonrefundable credit on their individual California returns for the PTET paid by the entity. The unused credit may be carried forward for up to five years.
For tax years beginning on or after Jan. 1, 2022, and before Jan. 1, 2026, a qualified entity making the election is required to pay a portion of the tax in advance, on or before June 15 of the year to which the election applies. The prepayment is the greater of 50% of the elective tax paid in the prior taxable year or $1,000 on or before June 15 for the taxable year of the election. If the tax payment has not been made on or before June 15, the qualified entity will not be allowed to make the PTET election for that year. Therefore, taxpayers electing to pay the PTET for a tax year beginning in 2022 must make a prepayment on or before June 15, 2022.