Over the weekend, we received clarification regarding a couple of the many unanswered questions regarding the implementation of the State Tax Deduction Workaround.

First, we are being advised that a Grantor Trust is eligible to participate in making the election to pay tax on a partnership/LLC or S corporation.

Second, since it is unlikely that the Build Back Better tax proposal will become law in its current form, the opportunity to get a better deduction in 2022 looks less likely.

What does this mean to you? While the election and payment are not due until March 15, 2022, there may be an opportunity to take the deduction on your 2021 return if a payment is made by December 31. There are a number of pundits who believe the prepayment will not result in a 2021 deduction and there is some support in the tax law for their position. The IRS has not issued specific guidance allowing for the 2021 deduction. If you decide to make the payment in 2021 we suggest receiving written statements from all partners/shareholders who want to participate before you make the payment to help establish the liability in 2021.

We are working on addressing the applicability for many of you. If you have not heard from us and would like our help, please contact us as soon as possible.

We have included specific instructions below for those of you that want to handle the payment yourself. Keep in mind that we will need to determine how this new law applies to you by no later than March 15, 2022. If we determine that it is not in your best interest, we can apply for a refund of the payment you make before the end of the year.

Instruction to Pay the Entity Level Tax for the State Tax Deduction Workaround

Payment Amount to Submit:
Based on individual, fiduciary, estate, or trust owners that are considering electing AB 150, determine their share of California income subject to tax and remit 9.3% of that amount as state tax payment.

Partnerships and LLC’s taxed as partnerships:
Electronic Payment: Go to CA Web Pay at ftb.ca.gov/pay/

    1. Form number to check:

a. Partnerships, check box: 565,
b. LLCs filing as a partnership, check box: 568

  1. Type of tax you are paying is: “Pass-through entity elective tax (Form 3893).”

Check: Mail the payment using form 3893(PTE) available at ftb.ca.gov/forms/2021/2021-3893.pdf

  1. Follow the payment and mailing instructions included on the form 3893(PTE).
  2. Complete all lines on form 3893(PTE).
  3. This payment is for Form: see Electronic Payment above.

S-Corporations:
Electronic Payment: If the corporation has paid estimated taxes in the past electronically then it is required to make the form 3893 payment electronically either using Electronic Funds Withdrawal or Web Pay at ftb.ca.gov/pay/:

  1. Form number to check: 100S
  2. Type of tax you are paying is: “Pass-through entity elective tax (Form 3893).”

Check: If you are not required to pay electronically, mail your payment along with form 3893(PTE).

  1. Follow the payment and mailing instructions included on the form.
  2. Complete all lines on form 3893(PTE).
  3. This payment is for Form: 100S.

Please contact us if you have any questions regarding the implementation of the State Tax Deduction Workaround.


About the Authors

Philip D’Amico, CPA, Principal
Tax, HospitalityPhilip D'Amico, CPA | Principal

Phil D’Amico functions in all areas of accounting with a specialty in real estate transactions and accounting. He received his undergraduate degree from Loyola Marymount University (Los Angeles) in May 1993. Phil is a Certified Public Accountant in the State of California and a member of the American Institute of Certified Public Accountants. He joined KROST in 2020. Previously, he was with Block, Plant, Eisner, Fiorito & Belak-Berger since 1994 and was admitted as a shareholder in 2006. » Full Bio

David Troost, CPA, Director
Tax, Technology IndustryDavid TroostDavid Troost is a Tax Senior Manager at KROST. He has spent his career being a client advocate. As a trusted business partner to his clients, he has helped them meet their objectives by serving as a sounding board for decisions. David’s area of expertise includes federal and multi-state tax compliance and consulting for individuals, partnerships, and corporations. » Full Bio