Qualified Net Income for California PTE - why isn't gain from disposition of Sec 179 property included?

[CPA2500]

S corporation client has a small ordinary business loss but a larger gain on disposition of Sec 179 assets. The gain on 179 assets has not been included in Qualified Net Income for purposes of the PTE election; but according to the FTB website it should be (website and relevant section reproduced below):

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

What lines of the Schedule K-1 are used to determine a qualified taxpayer’s income included in the qualified entity's QNI?

For an S Corporation, the share of QNI for a qualified taxpayer can generally be computed by taking the sum of the Schedule K-1 (100S) income (loss) lines 1-10 minus the deduction lines 11 and 12. For a partnership, the QNI for a qualified taxpayer can generally be computed by taking the sum of the Schedule K-1 (565/568) income (loss) lines 1, 2, 3, and 4c through 11 minus the deduction lines 12 and 13.

For purposes of the PTET, these Schedule K-1 lines are generally included to compute QNI. However, all items of any distributive or pro rata share of income should be included in QNI even if they are not included in the above Schedule K-1 lines. For example, Internal Revenue Code (IRC) section 179 recaptured income should be included in QNI, and any gain from the disposition of IRC section 179-expensed property should be included in QNI with the gain computed at the PTE level even though adjustments to the gain are made at the PTE-owner level.

Is there a way to override the QNI calculation in Lacerte, so that a PTE credit is given?

[Karl]

Also in CA. I appreciate you finding this, and including your links to research. My S-Corps are usually more vanilla than this, and none had disposals in CY, but I'm glad to know to watch for this.

I don't have the brainpower at this stage in tax season to dive into this, but my guess is the answer to your "why" question is just that it's a programming error.  So first, heads up that this is only a peer forum.  You need to either raise this to Support by calling or making a Tax Idea Exchange post (if you do, link that post here and I and others will happily upvote it).

What I see/notice in Lacerte is that only CA Form 3804, if I try to do "jump to input" on Part 1 Box 1 (total QNI), only jumps to Screen 42.011 Code 101 (just a checkbox that all shareholders want to elect in).  To fix this, I think there needs to be either an input/override QNI, or linking to include the gain from disposition of 179 assets.  The former is probably an easier ask this of Support late in tax season.

[CPA2500]

Thanks. I was afraid of this being a software issue. Will extend my client, and contact Lacerte support.

[CPA2500 · Accepted solution]

I contacted technical support. There's an override available. For each shareholder, you must enter their distributive share of QNI as an override on Screen 46.011 code 62 (almost at bottom of Screen 46.011).  Form 3804 is then prepared and credit shows up on the K1s.