CA pass through entity tax- Disregarded SMLLC

[MJFranco]

The individual module is used for SMLLC filings of a disregarded entity. The IRS wants the income reported on Sch C, CA wants a partnership return on form 568. These business owners qualify for the pass-through entity tax credit, however, there are no inputs in the individual module for CA form 3893 to allow current or estimated payments. 

The partnership module has it available, but it forces  the filing of a IRS form 1065, against their guidance for disregarded entities and changes income reporting from SCH C to SCH E pg 2

Please bring the functionality of the partnership module to the individual module with respect to the pass-through entity tax payments and automate it to roll-forward year after year. There are quite a few returns for SMLLC, disregarded entities that this applies to.

[Strongsilence-CPA]

"These business owners qualify for the pass-through entity tax credit,

I'd like to know more about this ownership and its entity.  SMLLC's do not qualify for the CA PTE. So, unless you have omitted something, the owners are not entitled to the PTE.

" there are no inputs in the individual module for CA form 3893 to allow current or estimated payments"

The inputs are in the passthrough entity tax return. Those inputs flow into the 1040.  

FROM CA.FTB.GOV

Who is a qualified taxpayer?

A qualified taxpayer is a partner, member, or shareholder of an electing qualified entity that is:

• An individual, fiduciary, estate, or trust subject to California personal income tax
• A disregarded single member LLC that is owned by an individual, fiduciary, estate, or trust subject to California personal income tax

To be qualified, a taxpayer must consent to have their pro rata or distributive share and guaranteed payments included in the qualified net income of the electing qualified PTE.

A qualified taxpayer is not a:

• Disregarded business entity and its partners and members
  • Except for a disregarded single member LLC that is owned by an individual, fiduciary, estate, or trust subject to California personal income tax
• Corporation
• Partnership

[wolfcpa]

The individual module needs to have the ability to elect in and pay the CA PTE tax for SMLLC. There is no function to elect into these PTE payments on the Individual tax module.

[tgibson]

Addtional Preparers have advised that this would be a great function to have within the Individual Module/

[Intuit_Ruben]

Thanks for the idea to bring the functionality of the partnership module to the individual module with respect to the pass-through entity tax payments and automate it to roll-forward year after year.  . We are changing the status to "Open for voting".

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[Strongsilence-CPA]

SMLLC's do NOT qualify!  This is Deloitte's guidance.

Qualified taxpayer excludes disregarded entities: While having a disregarded entity as a partner or member does not disqualify a pass-through from qualified entity status and making the CA PET election, a business entity that is disregarded is not eligible to receive CA PET credit. Entities that are disregarded under California Revenue and Taxation Code 23038 are considered disregarded for purposes of eligible taxpayer status; however, the FTB has confirmed that grantor trusts could be qualified taxpayers.  

Is the question referring to an SMLLC that is a member of a partnership?

@MJFranco Please clarify.

[wolfcpa]

To Strongsilence-CPA

I read over the FTB website, which you quoted in your top post. It says under the question "who is a qualified taxpayer?" and the answer includes:

A disregarded single member LLC that is owned by an individual.

Later is says on the same FTB website under the question "A qualified taxpayer is NOT a Disregarded business... EXCEPT FOR A DISREGARDED SINGLE MEMBER LLC THAT IS OWNED BY AN INDIVIDUAL".

I agree that it is a bit confusing, but according to the FTB website, there are 2 places where it says a SMLLC that is owned by an individual DOES qualify for PTE election. Please give a site or some reference that contradicts this position.

Based on this, I have manually calculated the 2024 PTE estimate for the SMLLC and manually included those instruction in the client cover letter since Lacerte does not have an option available.

Thank you for your help

[Strongsilence-CPA]

You are welcome for my help. Would you mind posting news of your tax return in a few months? I curious about if your tax return will be challenged, rejected, or accepted.

Best of luck.

More guidance should you want it:

The whole issue of SMLLCs and the PTE tax is confusing. An SMLLC is not a "qualified entity," meaning that the SMLLC can not make the election on behalf of its owner.  Only partnerships, S corporations, or LLCs taxed as an partnership or S corporation can make the election. A qualified entity can make the election to pay the tax on behalf of "qualified taxpayer" owners. "Qualified taxpayer" owners are limited to owners who are individuals, estates, trusts, and SMLLCs owned by an individual, estate or trust subject to California personal income tax. So although an SMLLC cannot make the election, if an SMLLC is an owner of a qualified entity, the qualified entity can pay the tax on behalf of an SMLLC that is owned by an individual, trust, or estate.

[AndreaSReich]

Definitely confusing, but here is a link to the FTB latest:

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

Appears that SMLLC does NOT qualify for PTE unless it is a member of another entity which does qualify.

[darrenengstrom]

Direct From the CA FTB website: Help with pass-through entity (PTE) elective tax (PTE tax) | FTB.ca.gov

Generally, no, a disregarded business entity and its owners cannot receive the PTE tax credit because it is not considered a qualified taxpayer. However, a disregarded single member limited liability company (SMLLC) that is owned by an individual, fiduciary, estate, or trust subject to California personal income tax and that is a partner, shareholder, or member of an electing qualified entity can receive the credit.

[darrenengstrom]

Pass-through entityPTE elective tax | FTB.ca.gov
A qualified taxpayer is not a:

• Disregarded business entity and its partners and members
  • Except for a disregarded single member LLC that is owned by an individual, fiduciary, estate, or trust subject to California personal income tax