December 17, 2025 | Tax Articles

In California, the “pass-through entity tax” (PTET) refers to an election by a partnership or S corporation to pay California income tax at the entity level and pass the federal deduction to its owners, with owners also receiving a California tax credit. The PTET was created in 2021 in response to the 2017 Tax Cuts and Jobs Act, which imposed a $10,000 limitation on the deductibility of state and local taxes (SALT cap). With the issuance of Notice 2020-75 in 2020, the IRS blessed state law frameworks to allow state income taxation at the entity level, with pass-through entities taking the federal deduction for state taxes without the SALT cap limitation, and then passing that deduction on to their owners in the form of a reduction in allocated net income.

In California, the PTET is available for “Qualified Entities,” which are entities taxed as partnerships or S corporations. A Qualified Entity elects to pay the PTET on an annual basis on a timely filed California tax return for the tax year. For tax years 2022 through 2025, the elective PTET is due in two installments: (i) the first installment is due on June 15^th, and is the greater of $1,000 or 50% of the elective tax paid the previous year; and (ii) the second installment is due on or before March 15^th of the subsequent year.

F Reorganizations

A reorganization under Internal Revenue Code Section 368(a)(1)(F) (F Reorganization) is described in the statute as “a mere change in identity, form, or place of organization of one corporation, however effected.” One form of F Reorganization involves the conversion of an existing S corporation into a wholly owned Qualified Subchapter S Subsidiary (QSub). In this form of F Reorganization, the converting S corporation (Target) forms a new corporation (Holdco), and the shareholders of Target transfer all of their stock in Target to Holdco. This makes Target a wholly owned subsidiary of Holdco. Holdco then files an election to treat Target as a QSub by filing IRS Form 8869, which makes Target a disregarded entity for tax purposes. Pursuant to IRS Revenue Ruling 2008-18, Target’s S election and all other tax attributes of Target transfer to Holdco on the effective date of the Form 8869.

For tax purposes, Holdco assumes the taxpayer identity of Target. Holdco will file a tax return for the entire tax year, reporting both Target’s pre-reorganization activities and Holdco’s post-reorganization activities. Importantly, though, Target retains its old taxpayer identification number (EIN), and Holdco uses its new EIN. California taxing authorities follow the federal tax treatment of F Reorganizations.

PTET Elections and F Reorganizations

In the F Reorganization example described above, assume that Target is a California S corporation engaging in an F reorganization in 2025. Assume also that, prior to the F Reorganization, Target made a PTET election, and paid the first PTET installment on June 15th. Later, upon the completion of the F Reorganization, Target’s S election and all of Target’s other tax attributes, including the PTET election and the payment of the first installment on June 15^th, are assumed by Holdco.

For tax purposes, Holdco has assumed the taxpayer identity of Target, and will file a tax return for all of 2025 (using Holdco’s EIN), reporting both Target’s pre-reorganization activities and Holdco’s post-reorganization activities. As mentioned above, California follows this federal tax treatment.

One issue in our example is, how should Holdco inform California that the PTET election and June 15^th payment made earlier by Target should now be attributed to Holdco, which has a different EIN than Target? There is no formal guidance from the California Franchise Tax Board (FTB) on this issue, but informal guidance suggests the following:

At the federal level, Holdco will file an S corporation tax return on IRS Form 1100S. In California, Holdco will file an S corporation tax return on FTB Form 100S. Along with the Form 100S for 2025, Holdco should file the following:

Holdco should attach an FTB Form 3804 (Pass-Through Entity Elective Tax Calculation) to its Form 100S.
Holdco should provide each of its shareholders with a 2025 FTB Form 3804-CR (Pass-Through Entity Elective Tax Credit) and FTB Schedule K-1 (100S), each listing Holdco under its own EIN as the electing pass-through entity.
Holdco should file an attachment with Holdco’s 2025 FTB Form 100S, and to all FTB Schedules K-1(100S), which clearly explains why, based on the F Reorganization described above, PTET liability and credits are being claimed on Holdco’s tax return even though the election and payments were made by Target. This would describe the F Reorganization and the effect of filing the IRS Form 8869 in accordance with Revenue Ruling 2008-18. The attachment should provide Target’s EIN and indicate that Target’s June PTET prepayment is a prior account credit for purposes of calculating the remaining elective tax amount by Holdco.
Informal guidance from the FTB states that the attachment, at a minimum, should include the following information:
- The legal name of Target, with the EIN under which the June 15^th payment was made;
- The amount of the payment and the date the payment was made;
- The legal name of Holdco and its EIN; and
- A request to transfer the payment from Target to Holdco with an explanation as to the reason for the transfer (ie., a description of the F Reorganization and the effect of filing Form 8869 in accordance with Revenue Ruling 2008-18).