Advocacy Win: CalCPA Critical in Resolving PTET Issue.

• Author: Fox, Jason

GOV. Newsom recently signed SB 851, which clarified a provision of California's elective pass-through entity tax (PTET) framework and how it works with the existing other state tax credit (OSTC).

Late in the legislative session, an issue with the interplay of the two credits arose. If not addressed, the issue would have likely lead to double taxation and lost tax credits for most multistate partnerships that opted into the PTET. To address this, CalCPA was one of the lead advocates that spurred the introduction and adoption of a legislative solution.

Specifically, SB 851 clarified the interplay of credits derived from the PTET with existing taxpayer credits resulting from the OSTC. When the PTET framework was first established in AB 150. the ordering of tax credits listed PTET credits as applying before the OSTC. Since the OSTC cannot be refunded or carried over in the same manner as the PTET, this credit ordering would have led to stranded OSTC--effectively resulting in double taxation for certain taxpayers that elected into the PTET.

CalCPA advocated for a solution to this issue, along with other adjustments to the PTET framework. In response, the Legislature passed SB 113 earlier this year to address these PTET issues.

However, the FTB noted that because the revised credit ordering failed to also make corresponding changes to the tax code governing the calculation of the OSTC, the PTET could not be factored into its calculation. Consequently, certain taxpayers that opted into the PTET would have still faced the dilemma of stranded OSTC and double taxation. SB 851 resolves this issue by ensuring that the PTET credits are considered in the calculation of the OSTC.

Since the inception of the PTET, CalCPA has been actively engaged with the Legislature, administration and tax agencies to establish an effective and administrable framework that can provide meaningful relief for California taxpayers. CalCPA advocacy has been critical in outlining the importance of this policy, getting it fast-tracked through the legislative process and making key improvements. While CalCPA continues to work on opportunities to incorporate additional improvements, our work has directly translated into significant savings for many eligible taxpayers, including most CPA firms.

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