CALIF PTE tax--- 1 SH elects and 1 doesn't elect --- need to override???#?$#

[Strongsilence-CPA]

S Corp, 

Husband and spouse are each a shareholder of the Scorp.

He elects and she doesn't in order to minimize the payment on March 15 and because the additional credit isn't needed.  (PTE credit would be higher than the CA tax for 2021.  Disregard 2022 tax for now.)

LC want me to override the Federal K-1s. I think, given this is March 11, they would have solved this and made it easier.

Did I input this correctly?  I didn't expect to need to do an override.

REF 56632

[Strongsilence-CPA]

More to this than I first thought.

Diagnostic says that the CA PEET "has been computed on some of the shareholders and will need to be taken as a deduction on the Federal return. As a result, the K-1s for all the shareholders will be getting a portion of this deduction reflected through ordinary income or rental income."

The deduction is in 2022 and will be taken next year.  

What does this mean?

I'm going to extend this tax return because LC needs to repair it.  And I know the PTE payment to make so it is not urgent.

[qbteachmt]

I found this resource:

https://www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/index.html

"An annual election is made on an original, timely filed tax return. Once the election is made, it is irrevocable for that year and is binding on all partners, shareholders, and members of the PTE."

"For taxable years beginning on or after January 1, 2021, and before January 1, 2026, qualifying pass-through entities (PTEs) may annually elect to pay an entity level state tax on income. Qualified taxpayers receive a credit for their share of the entity level tax, reducing their California personal income tax."

The Entity makes the election.

[Strongsilence-CPA]

Thanks you, QBTeach.

It isn't exactly on point but I appreciate it.  The entity makes the election. I'm trying to make the PTE payment lower. And I think one spouse can elect and one would not make the election.  This would reduce the PTE payment by half.

Are you in CA? 

I'm going over to caltax.com to see what that board offers.

[qbteachmt]

"Are you in CA?"

Not any more; the MT = Montana. My father was a Lacerte user, in Newport Beach.

[Karl · Accepted solution]

I'm in CA.  I'd proceed VERY cautiously. I was on a CalCPA webinar two weeks ago about this. They soft-advised against doing PTE for S-Corps if all shareholders didn't elect in. This disparity MIGHT be viewed as separate classes of stock and bust their S election.  More guidance is obviously needed, but something to be aware of.

[Strongsilence-CPA]

The two shareholders are married.  and community property rules might be a defense because they are legally entitled to 50% of income.  That might be creative.

[Strongsilence-CPA]

  I can be cautious and not file it. Or I can be cautious and file it.

Can a CPA be cautious even though filing such a return might be "playing the audit lottery"? 

I think exploring the ideas of adequate disclosure to the IRS and Form 8275 could be useful for CPAs in this situation.

[Karl]

I do love the 8275.  That gives me a lot of peace of mind amidst uncertainty.

I don't know that the married couple and community property rules would help if the IRS deems this disparate ownership down the road.  Even if they share ownership and a personal income tax return, the case could be made that half of their collective ownership received a tax benefit (and possibly a basis impact? TBD) that the other half didn't.

Good call extending.  If guidance comes out saying this isn't allowed after all, even if it's an irrevocable election, you'd have more room to say "oops, mea culpa" and fix it.