If you have a profitable S corporation, general partnership, LLC taxed as either an S corporation or general partnership, you should consider making the pass through entity tax election in planning with your tax professional.
To understand the pass through entity elective tax in California, taxpayers should first consider the background.
Per the Tax Cuts and Jobs Act, on schedule A the deduction for state and local taxes is limited to $10,000.
This limit usually harms high earning California taxpayers, who were used to deducting tens possibly hundreds of thousands of California taxes on their Federal tax returns.
With the pass through entity tax, the pass through entity will pay tax at 9.3% on the total of each consenting owner’s distributive share of income subject to California personal income tax.
Partners, members and shareholders who consent to making the pass through entity election are allowed a California credit at 9.3% of tax paid on their distributive share of the entity’s income.
There are a number of requirements and pitfalls in qualifying to make the election.
Contact tax attorney Abtin Barzin if you are considering make the election for your business.
If you have a schedule C business, you may want to consider incorporating or organizing as an LLC treated as a pass through to make the election.