High-income California business owners have the opportunity to take advantage of the Pass-Through Entity Tax (PTET) as a valuable tax credit, allowing them to save substantial amounts on their taxes by turning non-deductible state taxes into deductible business expenses. This strategy is particularly beneficial for those with higher household incomes, and the deadline to elect the PTET tax deduction in California is June 15, 2024. Having a proactive and tax-planning-focused financial planner can help individuals make smarter financial moves throughout the year and maximize tax savings.
The PTET strategy serves as a workaround for the SALT cap imposed by the Trump Tax Plan, which limited tax deductions for state and local taxes to just $10,000 annually for both single and married filers. By utilizing the PTET payment method, business owners can essentially have their business pay their state income taxes, making those costs fully deductible business expenses and allowing them to bypass the $10,000 SALT cap. This strategy is also beneficial for taxpayers who elect the standard deduction, as they can get a new business deduction for SALT taxes paid through the PTET election.
To take advantage of the PTET tax-planning strategy, individuals must run their business as a partnership or S Corporation. Publicly traded partnership employees are not eligible for the PTET. The PTE election must be made on an original, timely filed tax return, and once the election is made, it is irrevocable for that year and binding on all partners, shareholders, and pass-through entity members. For tax years beginning on or after January 1, 2022, and before January 1, 2026, the PTE election must be made when filing the tax return for the taxable year, and the initial payment must be made by June 15 during the tax year.
Tax payments for the PTET must be made within specific time frames and by certain deadlines. Payments can be made using the free Web Pay application accessed through the FTB’s website or the Pass-Through Entity Elective Tax Payment Voucher (FTB 3893). It is important to make the payments correctly to ensure they are coded as a PTE elective tax payment until the business tax return is filed. Qualified taxpayers can claim their PTE credit on their personal tax returns, and it is crucial to elect and make the first payment toward the California pass-through entity tax by June 15, 2024, to benefit from this tax-saving strategy.
If individuals believe they were eligible for the PTET in prior tax years and missed out on tax savings, it may be worth inquiring why their financial advisor or CPA did not inform them about this valuable tax-planning strategy. Ensuring that the PTET election is made correctly and on time can help high-income California business owners maximize their tax savings and reduce tax liabilities. Upgrading to financial professionals who can guide individuals through this process and meet their current financial planning and tax-planning needs is essential to make the most of the PTET and other tax-saving opportunities.
