Everyone is talking about PEET
California S-Corps and Partnerships may have heard about this guy PEET. You write him a big check in June and then he gets you a federal tax deduction. Does it sound too good to be true?
What is PEET?
PEET (also known as PTE and PTET) is not a guy. It is an acronym for the Pass-Through Entity Elective Tax which is a tax that pass-through entities voluntarily pay.
What? You volunteer to pay more in tax?
Weird, right?
How it works is the S-Corp or Partnership pays a tax of 9.3% of their California net income to the state of California. That payment is then deducted on the Federal tax return for the S-Corp/Partnership. This reduces the Federal taxable income and thus the Federal tax due for the shareholder/partners.
In addition, the 9.3% tax is treated as a credit toward the shareholder/partners personal state estimated tax payments.
So the right hand pays the tax, the left hand gets a credit, and you get a tax deduction in the middle.
The IRS is okay with this?
Yes, indeed. In Notice 2020-75, the IRS said this is an a-okay way to get more deductions.
So, should I be doing this with my S Corp or Partnership?
That is an analysis that each partner or shareholder needs to do with their tax professional. You have to be sure you have enough tax liability else the credit will be limited for you. If you cannot use it all in the current year, you don’t lose the credit, it carries forward.
When is the payment due for California Calendar Year Entities?
There are two payments required (1) Reservation payment and (2) a True-up payment.
Reservation Payment
For tax years through 2025, the reservation payment (greater of 50% of your prior year PTET or $1000) was due on June 15th. You cannot be late else you can’t participate!
Starting in tax year 2026 (thanks to SB132), entities can make a late reservation payment, but the amount of credit that can be claimed by the owners would be reduced by 12.5%.
For example, let’s say you were supposed to pay $1000 by 6/15 but forgot. You can still participate, but the credit would be reduced by 12.5% of $1000 or $125. So the shareholder would only be eligible for a credit of $875 instead of the full $1000.
True-Up Payment
Then you would do tax planning again at year-end to see if you want to make the balance of the payment in the current calendar year (to get the federal deduction this year), or if you want to wait until the next year to make the payment (to get the federal deduction next year), or decide not to participate and get the reservation payment refunded to you.
Do other states have this?
At least 36 states (as of July 2024) have an elective tax like this.
Does Cromwell help with this?
Yes, Cromwell has Tax Packages available where we meet with our clients in May, review their financials, and decide whether to participate or not. We have some clients who saved $300 and some clients who saved $45,000 on their federal taxes by participating in the PTET. So, it can be a great opportunity, especially for taxpayers in a high tax bracket.