The Pass-Through Entity Tax (PTET) may be the only time your tax planner tells you to pay an optional tax. The PTET is a valuable tax credit that can mean substantial tax savings for high-income California business owners. The tax-planning strategy can help you get around the onerous state and local tax cap and turn non-deductible state taxes into valuable tax savings.
For those of you who only speak with your tax preparer once a year when you file your taxes, you are likely missing out on substantial tax savings. You would essentially be leaving the IRS a ginormous tip.
The higher your household income, the larger the benefits from the PTET strategy could be. The deadline to elect to take the PTET tax deduction in California is June 15, 2024. This is why it’s important to have a proactive and tax-planning-focused financial planner in your corner, helping you make smarter financial moves throughout the year.
You may also hear the PTET elective tax called a SALT CAP workaround.
What Are The Biggest Benefits Of The PTET?
The Trump Tax Plan capped tax deductions for state and local taxes (SALT) at just $10,000 yearly, whether you file as single or married. This one part of the TCJA was a big slap in the face for high-income Californians.
If you own a home in California, your property taxes are likely close to or higher than the $10,000 SALT cap. This is even before looking at your state income taxes, which we know you incur to afford your house. The SALT cap is just $10,000 whether you are single or married.
With a Pass-Through Entity Tax payment, you essentially have your business pay your state income taxes. This helps turn those costs into fully deductible business expenses, getting around the $10,000 SALT cap.
This strategy is also great for taxpayers who elect the standard deduction. If this is how you file your personal return, you can get a new business deduction for SALT taxes paid via the PTE elective tax.
Who Is Allowed To Use The PTET Tax-Planning Strategy?
You need to run your business as a partnership or S Corporation to take advantage of the pass-through entity tax in California. If you work at a publicly traded partnership, you will not be eligible for the PTET.
How To File Your PTE Election In 2024
Your annual PTE election is made on an original, timely filed tax return. Once the filing election is made, it is irrevocable for that year and is binding on all partners, shareholders, and pass-through entity members.
PTET For Tax Years 2022 To 2025
For tax years beginning on or after January 1, 2022, and before January 1, 2026, the PTE election must be made when the tax return for the taxable year is filed, and the PTE must make an initial payment by June 15 during the tax year. The initial payment CANNOT, I repeat CANNOT, be made when filing your taxes after the tax year has ended.
I am mentioning prior tax years here to help you determine if you have missed out on tax savings over tax years 2022 and 2023. If you believe you were eligible for the PTET in the past, it may be worth inquiring why your financial advisor or CPA didn’t tell you about this valuable tax-planning strategy.
When You Need To Pay The PTE Tax
Your tax payments must be made within specific time frames and by certain deadlines.
2022 To 2025 Taxable Years
Use the following table from the Franchise Tax Board:
Payment dates
Due
Payment
On or before June 15, during the taxable year of the election
Payment 1
Pay $1,000 or 50% of the elective tax paid for the prior taxable year, whichever is greater.
On or before the due date of the original return without regard to extensions
Payment 2
Pay the remaining amount.
How To Make Your PTE Tax Payments For 2024
Tax payments aren’t much fun, but you still want to make them correctly. All PTE elective tax payments can be made using the free Web Pay application, accessed through FTB’s website, or the Pass-Through Entity Elective Tax Payment Voucher (FTB 3893). Do not try to combine your PTE payments with other tax payments. Once made, your PTE payments will remain coded as a PTE elective tax payment until your business tax return is eventually filed.
How To Claim Your PTE Tax Credit
Qualified taxpayers can claim their PTE credit on their personal tax returns.
Reminder: you must elect and make the first payment toward your California pass-through entity tax by June 15, 2024. If you believe you qualify to benefit from this tax strategy and your tax person or financial advisor is not up to the task of guiding you through this process, it may be time to upgrade to financial professionals who meet your current personal and business financial planning and tax-planning needs.
