California’s pass-through entity landscape — which includes S corporations, partnerships, and multi-member LLCs taxed as partnerships — comes with its own set of filing requirements, deadlines, and tax rules. Business owners with these structures often need a tax professional who goes beyond basic return preparation. This guide explains what to look for when hiring for a California pass-through entity.
What Makes Pass-Through Entities Different
Pass-through entities do not pay federal income tax at the entity level. Instead, income, deductions, and credits “pass through” to the individual owners, who report them on their personal returns. However, California imposes its own rules on top of the federal framework:
- California S corporations pay a 1.5% franchise tax (minimum $800) on net income
- Partnerships and LLCs taxed as partnerships pay an $800 annual minimum franchise tax plus an LLC fee based on gross receipts
- The California pass-through entity (PTE) elective tax, available since 2021, allows qualifying entities to pay tax at the entity level to help owners work around the federal SALT cap
The California PTE Elective Tax
The pass-through entity elective tax is a significant California-specific planning opportunity. Eligible S corporations and partnerships can elect to pay a 9.3% tax on qualifying net income at the entity level. Qualified taxpayers then receive a credit on their California personal return equal to the amount paid. This structure can provide a meaningful federal deduction that individual owners cannot otherwise claim due to the SALT limitation.
This election involves strict deadlines and specific payment timing requirements. A tax professional unfamiliar with California’s PTE rules may miss the election window entirely.
What to Look for in a Pass-Through Entity Tax Professional
When evaluating a CPA or EA for pass-through entity work, ask:
- Do you regularly prepare California Form 565 (partnership returns) or Form 100S (S corporation returns)?
- Are you familiar with California’s PTE elective tax and the payment deadlines?
- Can you coordinate the entity-level return with the owners’ personal returns?
- Have you handled California FTB inquiries on pass-through entity matters?
Coordination Between Entity and Personal Returns
A key advantage of working with one professional — or one firm — for both your entity and personal returns is the ability to coordinate information consistently. Errors in a K-1 can cascade into problems on the personal return. A professional who handles both has full visibility into how the pieces fit together.
Official sources referenced: IRS.gov, California Board of Accountancy (dca.ca.gov/cba), California Franchise Tax Board (ftb.ca.gov). Not reviewed by a credentialed tax professional.