Where to to input PTET as a deduction item at 1120S? (California S-Corp, 1120S and 100S, TurboTax Business, PTET)

[yangguoguo]

Dear Expert:

I am asking the question regarding where to input the PTET as a deduction item in 1120S when using Turbo Tax Business version.  (Or did I misunderstand something here). 

Here is the background: I am a California based S-Corp. I am using the TurboTax Business desktop version. 2023 is the first tax year I am electing for PTET. I have paid the initial $1000 during year 2023. Now I am preparing the business tax return by using TurboTax Business. 

I have read the community articles regarding the PTET topic. I have learned  how to go through Form 3804. 

I am using the accrual method. So my understanding is that I may deduct the PTET payment (due 03/15/2024) as a deduction for year 2023. My question is where to input this PTET payment as a deduction item on 1120S. 

Let us say I have business income 1000 for year 2023. Expense is X excluding the (tax and license) items.  State Income Tax had been calculated as Y. PTET had been calculated as Z. 

In TurboTax  Business--> Federal Taxes-->Deductions --> Business Expenses --> Taxes and licenses:

I input the State Income Tax as Y. (This is the TurboTax calculated result from State Tax part)

I input the Other Taxes as Z.  (PTET amount, This is the turbo Tax calculated result from State Tax part)

I can see that on the federal side, my income is being calculated as (1000-X-Y-Z), which is reflected in the K-1 as well, the income is showing as (1000-X-Y-Z) on the K-1.  

However when I look into the calculation of the state income tax on the 100S, I can see that the state income was inheriting from the federal income of (1000-X-Y-Z) and then by adjusting back to the recognized state income tax. I can see that on the resulted 100S, the state was recognized as (1000-X-Z). 

This seemed to be something wrong, since I believe that the state recognized income should be (1000-X), i.e. both the PTET and State income tax should be adjusted back. 

So again my immediate question is where to input the PTET on the federal tax deduction part? Or should it be input on the federal tax deduction part?

Did I misunderstand something here? Your advice will be most appreciated. 

Thanks. 

Andrew

[PatriciaV · Accepted solution]

In order for both CA income tax and PTET payments to carry over to the California Form 100S, you'll need to enter both under the Federal Deductions >> Taxes and Licenses >> State Income Taxes. You can either add them together, or right-click and use Add Supporting Details to document the calculation. The result will appear on Form 100S p1-3 Line 1 under State Adjustments.

Be sure you have the PTE box checked for all partners on the CA Schedule K-1 Worksheet. This activates Form 3804 to calculate the elective tax credit amount for each partner.

Also, open CA Form 3893 to enter the amount of the pre-payment on page 1 of that form. The tax due then appears on page 2.

Report the amount you pre-paid for California income tax during the California interview by checking the box for "Estimated Tax Payments." Enter the amount paid and payment date for the appropriate quarter(s). You can also enter this manually on the CA Information Worksheet using Forms Mode.

[yangguoguo]

@PatriciaV  Thank you for your great help on this one. 

I observed your input on several threads of the similar PTET topic. It helped a lot. 

I also have a follow up question. What are the relevant output (forms) from the business tax return which I may bring to my individual tax return preparation?

For example, I have a S-Corp located in California. I prepared 1120S and 100S for my business tax return.

The K-1 (with a reduced income amount by the PTET payment amount) will be used for my individual Federal tax return 1040. 

How about my individual state income tax return 540 side?

What form coming out of my business tax return should be used for my individual state income tax return? i.e. which form to be used to claim the state tax credit out of PTET in my individual state income tax return? Is it form 3804 or some other form? 

Thanks. 

Andrew

[PatriciaV · Accepted solution]

Your California S-Corp return includes a California Schedule K-1 for each shareholder. You can either include a copy of Form 3804 with the CA K-1, or manually enter the amount of PTET allocated to each shareholder on Sch K-1 Line 18e. This is the amount the shareholder would report on their Federal return as California taxes paid on their behalf.

@yangguoguo 

[yangguoguo]

@PatriciaV

Thank you for your detailed response. I will follow up and try as you have instructed. 

Thanks.

Andrew

[Alice688]

I am confused. In your calculation, isn't Y the same as Z? They are both your 2023 S-Corp income tax, right? By entering both you are double reporting and deducting your same 2023 income tax, right?

[Alice688]

PatriciaV,

I want to see if you or someone else can answer my question.

I am living in VA and using TurboTax business to file my LLC tax return. I am also very confused on the PTET reporting on K-1. I elected PTET for 2022 tax year and paid it with my 2022 VA business tax return last year. Based on the following post I read last year (the only post I could find on the internet regarding reporting PTET on K-1), I need to report the PTET for 2022 tax year I paid in 2023 in the 2023 tax return. I was not supposed to report it in the 2022 tax return. Is this right? I use cash method for accounting.

https://ttlc.intuit.com/community/business-taxes/discussion/if-the-partnership-pays-ptet-in-april-20...

Starting tax year 2023, the VA Taxation requires entities to pay the estimate PTET in the same year. So I paid X amount of estimate PTET in 2023 for the 2023 tax year. Now should I report this estimate PTET I paid last year on the K-1 of 2023 tax return? I am thinking this can make sense because this is similar to the personal state income tax withhold. You get the deduction first. If it is an overpayment you will pay the tax on the overpayment next year.

[PatriciaV]

Yes, the LLC should report the tax paid in the year it was paid. The member will then report both the 2022 tax payment and the 2023 PTET tax under Pass-Through Entity Elective Tax Paid on the Virginia State tax return.

@Alice688

[edited 3/12/2024 | 8:29 am PDT]

[Alice688]

PatriciaV,

Thank you very much for your reply. I am not clear on your answer. After reporting both the 2022 PTET and the 2023 estimated PTET paid in 2023 under Taxes and licenses in TurboTax Business, the amount was been included in 1065 line 14 Taxes and licenses which is a Deduction to the Ordinary business income. This ordinary business income reported in K-1 has already been reduced by both PTETs paid in 2023. When you say “the member will then report both… “, I assume that you mean reporting in their personal tax return Form1040. Now I don’t understand why that should be done as the K-1 Box 1 amount has already been reduced by the PTETs paid in 2023. Also it was done on the entity level.  I don’t I feel that on the personal level we should do more than just using the K-1 numbers. If we enter the numbers in the personal tax as you suggested, we will be deducting the PTETs twice, once on the entity level, and again on the personal level. I don’t think we should do that. 

[PatriciaV]

The PTET payments are expenses to the Partnership, which reduces income on Schedule K-1 Line 1. The partner receives credit for these tax payments on the State Income tax return. These payments reduce the state tax liability but aren't included on the federal tax return.

I have revised my previous answer to reflect this information.

@Alice688 

[Alice688]

The original problem with your before-revised reply was that the PTETs were deducted twice. Furthermore it is the entity level tax and shouldn’t be entered into the personal tax return without following the K-1numbers. My point is that everything you can enter into the personal tax return must be from K-1.

What you revised sounds better. But it is still not exactly correct. The PTET for 2022 tax year has been entered in last year’s VA return by following last year’s VK-1. For this year, only the 2023 PTET shown in this year’s VK-1 can go into the personal VA tax.

The complexity here is that we must follow K-1 to file 1040, and VK-1 to file VA personal tax. K-1 is different from VK-1. Both 2022 PTET and 2023 PTET paid in 2023 goes into the 2023 K-1, but the 2022 PTET went into the 2022 VK-1 and the 2023 PTET goes into the 2023 VK-1. The VK-1 for each year is used for that year’s VA personal tax return.

[yangguoguo]

@PatriciaV 

Hello, Patricia:

Thank you for your help on this track. 

Here is what I had been doing. I had attached the CA 3804 form to my K-1, using the form 3804 to demonstrate my PTET payment. 

Also when I filed my individual tax return, I added the PTET amount as estimated state tax payments with the PTET payment date and amount respectively. 

Today I received a letter from California FTB. Basically the letter said that they only found part of my estimated state income tax payment (which equals to the amount what I paid as individual estimated state tax), but missing the amount which equals to my PTET payment.  The letter stated that I need to make additional state income tax payment for the amount which equals to the PTET payment. 

I double checked my individual tax return. I noticed that there wasn't  any form attached in my individual tax return demonstrating the PTET payment. The PTET amount was embedded into the state estimated tax payment field. 

So what should I do now? Should I attach the S-corporation form CA 3804 into the feedback letter to FTB as an explanation? What should I do next year to avoid the same situation from happening again?

Another thing is that I purchased the audit defense from Intuit. Should I contact audit defense for this one?

Thank you for your help!

Andrew

[yangguoguo]

@PatriciaV 

Hello, Patricia:

On the same topic, in addition to my previous question, I also found the below Q/A track which you answered in year 2023 for tax year 2022 return. 

https://ttlc.intuit.com/community/after-you-file/discussion/ca-salt-workaround-form-3804-cr-and-k-1-...

In this track I noticed that you had mentioned to input the PTET amount at multiple places on the Federal K-1 and California state K-1. 

To compare your previous advice with my own corporate tax return on year 2023, it seemed that the PTET payment was not reflected in either my federal K-1 nor the state K-1. Currently I only have one CA-3804 form which had demonstrated the PTET payment. 

Is that still OK? 

Thanks. 

Andrew