Delays for Tax Season
February 17, 2022
For various reasons, (summarized below) we anticipate many passthrough entities with California filing requirements will experience delays in completing their 2021 tax returns and as a result an increasing number of entities will need to file extensions. Due to these delays, owners invested in these entities could have longer to wait for their K-1s.
Passthrough Entity Tax Election reconciliation forms not yet released by California FTB
New for tax year 2021, California allows eligible passthrough entities to elect to pay a tax on behalf of eligible passthrough owners at a rate of 9.3% of qualified net income. This tax is paid at the entity level and provides a deduction and benefit for Federal purposes, and a corresponding credit for California purposes. This credit flows through to the owners of the entity to be used as a credit against California income tax at the individual/trust level. Since the Governor signed SB 113 which retroactively expanded the benefits of the passthrough entity tax election to more taxpayers, it is likely an increasing number of entities will consider making this election. The election is required to be made on an original, timely filed return. The amount of this elective tax is required to be reconciled on the 2021 tax return, and the forms for disclosing this have yet to be released. Any entity making this election will need to hold off on filing their 2021 tax returns until the forms are available.
California FTB requiring capital accounts to be reported using California tax basis
New for tax year 2021, California is requiring California partnerships/LLCs report capital accounts using California tax basis. This announcement was last minute and unexpected, and guidance expected to provide clarity and important details on the implementation is still pending. This change will impact most partnerships filing in California and may require these businesses to provide additional information so calculations can be completed to determine the correct presentation using the new basis.
Federal K-2/K-3 filing requirements
New for tax year 2021, partnerships and S-corporations must file Federal Schedule K-2 and Schedule K-3 if the entity has relevant information related to certain international activities. These new schedules significantly expand on previous reporting requirements and though we don’t expect this to apply to all entities, there will be many impacted by this change. Complying with these requirements will impact the time needed to accurately prepare the related 2021 tax returns, and could therefore impact the timing of K-1s being distributed to owners.
In addition to these specific examples, the tax landscape continues to be ever changing, with new legislation passing frequently and many retroactive changes impacting 2021 tax returns across the board. With this in mind we advise starting preparation of tax returns as early as possible, even if you expect to be filing an extension due to waiting on K-1s or other information. We recommend being proactive in gathering your tax information and forwarding it to your tax preparer as it becomes available so they can ensure they have the information needed to prepare a complete and accurate return or extension as applicable.
We appreciate the opportunity to work with you and are available to answer any questions or concerns you may have.
Gatto, Pope & Walwick, LLP
Certified Public Accountants