Consider a Passthrough Entity Tax Credit

The start of the new year brings another opportunity to consider electing into a passthrough entity tax credit. California requires that the election be made no later than June 15, 2023; payment is due at the time of election, which amounts to the greater of $1,000 or 50% of the credit claimed on the 2022 tax returns. Deciding whether to claim the passthrough entity election credit in California depends on your individual circumstances and business operations. Here are a few things to consider when making this decision:

1. Eligibility: Make sure that you and your business meet the eligibility requirements for the credit. The credit is only available to certain types of businesses, such as partnerships, S corporations, and limited liability companies (LLCs) that are taxed as partnerships or S corporations. Qualified trade or business: The business must be a qualified trade or business, meaning that it is an active trade or business other than certain specified businesses like professional service businesses, and rental real estate activities.
2. Tax liability: Determine if the credit will result in a reduction of your California tax liability. The credit is only available to the extent that it reduces your California income tax liability.
3. Credit amount: Calculate the amount of the credit you may be eligible for. The credit is equal to a percentage of the qualified business income (QBI) from the qualified trade or business. The percentage varies depending on the type of business and the amount of QBI.
4. Timing: Consider the timing of when you want to claim the credit. The credit can be claimed in the tax year the income is earned or carried forward to the next tax year.
5. Other credits and deductions: Take into account other credits and deductions that may be available to you. Some other credits and deductions may be more beneficial than the passthrough entity election credit, so it’s important to compare the benefits of each.
6. Keep records: Make sure to keep accurate and detailed records of your business income, expenses, and activities. This will make it easier to calculate the credit and to support your claim if audited by the tax authorities.

In summary, claiming the passthrough entity election credit in California can be a beneficial way to reduce your state tax liability. However, it’s important to carefully evaluate your individual circumstances to ensure it is in your best interest to make the election. Please contact our tax team at [email protected] to perform a specialized analysis for your circumstances.

Many states also have similar programs, but limitations and benefits vary significantly from state to state. If your business has significant liabilities within a particular state, we will happily give you some insights and make recommendations on filing for an election.