Dear [CLIENT NAME]:
As we discussed earlier this year, a qualified passthrough entity and its owners must make an annual election each year to pay California’s passthrough entity elective tax and receive the tax benefits that the elective tax provides. To preserve the right to make the election for the 2024 taxable year, the passthrough entity must make a prepayment of the tax by June 17, 2024. An entity that fails to make the required prepayment is prohibited from making the election for the 2024 taxable year.
For a quick refresher: California’s passthrough entity elective tax statute allows qualified S corporations, partnerships, or LLCs to pay tax on their individual, trust, estate, and certain single member LLC owners’ share of the entity’s qualified net income at the entity level. It also allows these owners to claim a credit for the tax paid on their California personal income tax return.
Having the entity pay the tax may reduce your federal taxable income by the amount of tax paid, and you may also qualify to claim a 100% California credit equal to the amount of the entity tax paid on your share of the entity’s income.
The amount of the June 17 prepayment is the greater of:
- 50% of the passthrough entity elective tax paid for the prior tax year; or
- $1,000 (if you did not make the election for 2023 and will not do so on an extended return, then only $1,000 has to be paid by June 17, 2024 if you want to make the election for 2024).
The 50% figure is currently nonnegotiable, even if we know the entity’s income for 2024 will be less than it was for 2023. There is also no reasonable cause exception for not meeting the 50% threshold. This is true even if your 2023 entity tax return is still on extension.
Because of this all-or-nothing rule, for returns still on extension we are advising clients to add a “cushion” to what we estimated the 2023 tax liability to be so you do not lose the right to make the election for 2024.
Entities make the payment by:
- Check using a 2024 Form 3893, which we can prepare for you, and have you mail certified mail for proof of mailing; or
- Using the FTB’s Web Pay feature at: https://webapp.ftb.ca.gov/webpay/login/belogin?Submit=Use+Web+Pay+business; or
- Electronic fund withdrawal when we e-file your return.
With the prepayment deadline fast approaching, it is critical we discuss whether making the election for 2024 is the right move for you and your passthrough entity this year. Please contact our office immediately so we can set up an appointment to evaluate your situation.
Sincerely,
Your tax professional
