When California first passed the Passthrough Entity Elective Tax (“PEET”) the law (AB 150) had some limits that made it not as attractive for some taxpayers. Since then there have been some retroactive fixes to the law (SB 113) eliminating three major drawbacks. If you plan to make a PEET payment for 2022, the first payment is due June 15.
If you considered the PEET and decided not to make a payment for 2021, reconsider it for 2022 based on these three fixes:
- Tentative Minimum Tax limitation. The PEET can now reduce your California tentative minimum tax, making it much more beneficial to many more taxpayers.
- Entities with Partnership Owners. The PEET is now available to entities that have owners that are partnerships. Previously if Partnership A was owned by multiple partners and Partner 1A was a partnership, Partnership A could not pay the tax for individual Partners 2A and 3A even though they weren’t partnerships. Now, Partnership A still can’t pay the tax for Partner 1A, but Partners 2A and 3A can take advantage of the PEET (and so can Partner 1A’s owners separately because they are also qualified taxpayers).
- Single Member LLCs. For a single member LLC to be eligible for the PEET it must either be taxed as an S corporation or have two members (including a married couple as community property if they elect partnership taxation). Now single member LLCs owned by an individual, estate or trust are considered qualified taxpayers, so if they own part of a qualified entity, the entity can pay the PEET for them and the single member LLC owner can claim the credit on their return.
For taxable years 2022 through 2025 the first PEET payment is due June 15. The amount paid by June 15 is the greater of 50% of the PEET paid for the prior year of $1,000. Caution! If the June 15 payment is insufficient you are ineligible to make the tax election for that year, and any underpaid amount will have to wait for a refund until after your final tax return for that year is filed. The remaining payment is due by March 15 of the following year (the tax return filing deadline).
This blog is written as of May 16, 2022. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.