Question: My client is just now paying the PTET for California with a timely filed election. Can they deduct the tax payment if they are an accrual basis taxpayer?
Answer: Based on face value, unfortunately, the answer is no.
Both cash and accrual basis passthrough entities would need to pay the tax by 12/31/21 (assuming calendar year-end) to get the deduction on the 2021 tax return.
This answer is based on IRS Notice 2020-75, stating that an entity could take a deduction in the year paid. While the guidance did not specify cash or accrual in the definition, unless the IRS comes out with any other guidance stating otherwise, it is a federal deduction so it works the same as accrued state taxes, which the taxpayer must pay by the end of the tax year to deduct the amount following the economic performance rules.
However, what if your client is an accrual basis taxpayer? While Notice 2020-75 does not specifically distinguish or reference method of accounting, there may be a way to fix your 2021 state tax deductions if you missed the 12/31 deadline.
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