FTB-COT Liaison
FTB-COT Liaison
to make the election , resulting in a loss of expected California PTET credits to those individuals ? The FTB had the funds , albeit credited to the partnership and not the individuals ’ accounts , and the individuals did not . Would such a situation be considered reasonable cause for getting penalties and interest abated ?
It is our understanding that entity-level estimated tax paid in to the FTB by an S corp using Form 100-ES cannot be applied toward any PTE withholding balance due with the corresponding return , so that it is possible for an S corp to report an overpayment on its tax return relating to the corporate-level tax , but also have a balance due relating to PTE withholding . However , we have seen notices this year indicating that the amount applied to next year ’ s estimated tax has been reduced by the amount of PTE withholding still outstanding ( essentially applying the overpaid corporate tax to the outstanding PTE liability ). Please clarify as to whether corporate estimated tax can or cannot be applied against a PTE balance due on an S Corp tax return .
How are penalties and interest calculated for PTET balances due paid after the initial filing deadline ( generally March 15 for calendar year entities )?
FTB Response ( Combined for Qs 1-4 )
As you may be aware , due to the short implementation timeframe and complexity of the PTET legislation , as well as FTB internal resource constraints , operationalizing the PTET program has been challenging . The rapidly approaching sunset date of the legislation ( Dec . 31 , 2025 ) has also been a factor in what we are able to implement , as building out large technology solutions for a short-term program were just not feasible .
At this time , we do not anticipate making any further changes to our tax programs or technology solutions related to the PTET .
We appreciate your patience and partnership as we work together with you on these issues . To assist with future questions , please visit our website ( ftb . ca . gov / file / business / credits / passthrough-entity-elective-tax / index . html ) to find information on the PTET , as
well as an FAQ section to help answer questions we get often .
Please note that any penalties and interest calculated for PTET balances due at the initial filing deadline are calculated as any other tax liability owed . In addition , there are no special rules for reasonable cause or interest abatement related to the PTE tax and credit . Therefore , standard penalty and interest rules apply . As for questions of a more account-specific nature , such as requests for reasonable cause and abatement that may be fact-specific in nature , our Tax Practitioner Hotline is available to assist you and provide you the information you need to resolve these inquiries .
Notices
Some taxpayers are receiving notices adjusting the penalties on 2022 tax returns filed in 2023 under the provisions of the 2023 storm extension . Some of the notices seem to be applying penalties without regard to the storm extension ; others make small adjustments ( a few dollars ) to the penalties calculated manually by the practitioner or taxpayer . All require significant time to review and respond to . To minimize such notices , what information would the FTB like to see submitted with the Form 5805 ? A calculation of the adjusted penalty amount in the footnotes ? Identification of the applicable disaster ? Is there any sort of tool provided by the FTB to calculate the adjusted penalties in these situations so that practitioners can use the exact calculation and rounding the FTB will be using to minimize the issuance of notices for small dollar amount adjustments ?
FTB Response
We appreciate your question in wanting to ensure accurate processing of Form 5805 , Underpayment of Estimated Tax by Individuals and Fiduciaries . While form instructions can change from year to year , we are happy to share the current method to accurately complete Form 5805 when utilizing it for emergency tax relief .
For part one , question one , it is important to check the “ yes ” box to indicate a waiver of the penalty is required . In the space provided with that question , write the name of the disaster . Complete FTB 5805 through Part II , line 12 ( Worksheet II , Regular Method to Figure Your Underpayment and Penalty , line 13 if you use the regular method ) without regard to the waiver . Write the amount you want waived in parentheses on the dotted line next to Part II , line 13 ( Worksheet II , line 14 if you use the regular method ). Subtract this amount from the total penalty you figured without regard to the waiver , and enter the result on Part II , line 13 ( Worksheet II , line 14 if you use the regular method ).
The FTB does not have a tool or calculator available to taxpayers or tax professionals to help determine the exact calculation at this time . We appreciate the suggestion and passed the idea forward .
Educational Outreach Letters
Some taxpayers are continuing to receive educational outreach letters , which are sent to taxpayers with expenses on Schedule A and Schedule C that are “ significantly higher than expected .” Do you have any information or statistics on how effective this program was in past years at getting taxpayers to amend and correct their returns ?
FTB Response
The FTB is committed to seeking less intrusive means of encouraging compliance from taxpayers . We started this letter campaign in January 2022 to help taxpayers identify areas where a correction may be necessary .
We identified pools of taxpayers who had potential noncompliance items on their Schedule A or Schedule C filings .
The purpose of these Review Return letters was to inform taxpayers when their itemized deductions on Schedule A or their expenses reported on Schedule C seemed higher than expected based on data analytics .
The letters were not to begin an audit , but to inform taxpayers of common errors we find on these schedules . The letters are a tool for FTB to provide relevant resources for the impacted taxpayers to review their returns and file an amended return , if necessary . If their schedule was accurate , no further action was needed
16 CALIFORNIA CPA JANUARY / FEBRUARY 2025 www . calcpa . org