Real Estate Withholding Credit for Pass-Through Entities

The California Franchise Tax Board (FTB) has recently published a reminder about credit for real-estate withholding. According to the FTB:

Pass-through business entities that pass through their income, deductions, and credits to the owners must also pass through the real estate withholding credit. What is a pass-through entity? It is an S corporation, limited partnership, or limited liability company. A general partnership is treated the same as a pass-through entity, though technically it is not one.

The FTB advises that it cannot refund that part of the real estate withholding credit that exceeds the pass-through entity’s total tax or fee due.

S corporations, limited partnerships, and LLCs may use the withholding to offset their outstanding liability, tax, or fee. Any excess withholding must be allocated to the shareholders, partners, or members.

General partnerships don’t have a California income tax or franchise tax liability and must allocate the entire amount of the real estate withholding credit to the partners.

The pass-through entity’s withholding must flow through to the shareholders, partners, or members (typically, in accordance with the allocation of gain from the sale of the real estate). The shareholders, partners, or members can claim the withholding credit against their individual tax liabilities as long as they are not themselves a pass-through entity.

For more information, see FTB Pub. 1017, Resident and Nonresident Withholding Guidelines.

If you need assistance with arbitration, buy-sell agreements, or outside general counsel, contact Attorney Richard Burt. Serving San Jose, CA and all of the San Francisco Bay area, Mr. Burt can be reached at (408) 286-7333 or by filling out the online contact form.

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