California Form 3804: PTE Tax Election Instructions
Understand how a California pass-through entity can elect to pay state tax, which provides a direct tax credit for its owners on their personal returns.
The pass-through entity (PTE) elective tax is a response to the $10,000 federal limitation on state and local tax (SALT) deductions. For tax years 2021 through 2025, California allows certain business entities to pay state tax at the entity level on behalf of its owners. This structure shifts the state tax payment from a limited individual deduction to a fully deductible business expense for federal purposes, reducing the overall tax burden for owners.
The business entity pays a 9.3% tax on its qualified net income, and owners then receive a credit on their personal California income tax returns for their share of the tax paid. California Form 3804, Pass-Through Entity Elective Tax Calculation, is the document used to compute and report this elective tax.
Determining Eligibility for the Election
To make the PTE election, a business must be structured as an S corporation or a partnership. This includes limited liability companies (LLCs) that have elected to be taxed as either a partnership or an S corporation. The entity must not be publicly traded and cannot be part of a combined reporting group. An ownership restriction is that the entity cannot have a partnership as one of its partners, members, or shareholders.
An entity’s eligibility also depends on its owners. A “qualified taxpayer” is an individual, fiduciary, estate, or trust subject to California personal income tax who consents to have their income included in the PTE tax calculation. A business cannot make the election if one of its owners is a corporation or a partnership, with an exception for a single-member LLC owned by an individual, estate, or trust.
The decision to make the election is made annually and, once made on a timely filed tax return, is irrevocable for that year. This decision binds all partners, shareholders, and members of the entity. The calculation of the tax, however, is based only on the income shares of the consenting qualified owners.
Information and Calculations for Form 3804
Preparing to complete Form 3804 requires the entity’s legal name, Employer Identification Number (EIN), or California Corporation Number. The entity will need its total net income, as reported on its primary state return, such as Form 565 for a Partnership Return of Income or Form 100S for an S Corporation Franchise or Income Tax Return. This total income figure must then be separated to identify the income attributable specifically to consenting qualified owners.
This segregated amount is termed “qualified net income” and forms the basis of the PTE tax. It is the sum of the pro-rata or distributive shares and any guaranteed payments for services rendered to the entity by each qualified taxpayer. The entity must have a clear record of which owners have consented, as only their share of income is included in this calculation.
The calculation is performed in Part I of Form 3804. The total qualified net income is multiplied by the elective tax rate of 9.3% to determine the total PTE elective tax for the year. Part II of the form determines the final amount due or any overpayment by subtracting any estimated tax payments made during the year from the total elective tax.
The form also includes a Schedule of Qualified Taxpayers, which must be completed. This schedule requires the entity to list each consenting qualified taxpayer, their identification number, and their individual pro-rata or distributive share of the qualified net income.
Making Payments and Filing the Form
An entity making the PTE election is required to make two separate estimated payments. The first payment is due by June 15 of the tax year and must be the greater of $1,000 or 50% of the elective tax paid in the prior year. For entities making the election for the first time, the first payment is $1,000.
The second payment, covering the remaining balance of the PTE tax, is due by the original filing deadline of the entity’s tax return. These payments must be made specifically for the PTE tax and cannot be combined with the entity’s other tax liabilities, such as its franchise tax. Payments can be made electronically through the FTB’s Web Pay portal or by mail using Form FTB 3893(PTE), the Pass-Through Entity Elective Tax Payment Voucher.
The completed Form 3804 must be submitted with the entity’s annual tax return. For a partnership, it is attached to Form 565, and for an S corporation, it is attached to Form 100S. The election is formally made by filing the return with Form 3804 attached by the original or extended due date on a timely filed original return.
Claiming the Credit on Individual Returns
After the entity pays the elective tax, the benefit flows to its owners. The business is responsible for reporting each owner’s share of the PTE tax credit on their California Schedule K-1. This document provides the owner with the specific credit amount they are entitled to claim on their personal state tax return. The credit is nonrefundable but can be carried forward for up to five years if it exceeds the owner’s tax liability in the current year.
To claim the credit, the owner must complete and attach Form 3804-CR, Pass-Through Entity Elective Tax Credit, to their California income tax return (Form 540 or 540NR). This form requires the taxpayer to list the name and identification number of each PTE from which they are receiving a credit, along with the credit amount from each.
The total credit from Form 3804-CR is then transferred to the individual’s main tax return, which directly reduces the owner’s net tax payable to California.