Model California's pass-through entity elective tax: Schedule CA add-back and FTB 3804-CR credit #10217

Title: Model California's pass-through entity elective tax: Schedule CA add-back and FTB 3804-CR credit

Problem

California lets a partnership or S corporation elect to pay a 9.3% tax on its qualified net income. Each owner who is a qualified taxpayer then takes a nonrefundable credit equal to 9.3% of their share. PolicyEngine models neither side for the owner:

1. Income. The entity deducts the elective tax federally, which lowers partnership_income / s_corp_income. California does not allow that deduction, so the owner's California income must add it back. Today ca_agi is understated by the add-back unless the user overrides ca_additions.
2. Credit. There is no FTB 3804-CR credit. The credit is nonrefundable, can reduce regular tax below tentative minimum tax, and carries forward five years. Without it, California net tax is overstated by the full credit.

No CA variable or parameter mentions the elective tax on main (2.42.0).

Reproduction (main, 2.42.0)

Synthetic case: 2025, single, CA. A partner's K-1 shows $500,000 of ordinary income after the entity deducted $46,500 of elective tax ($500,000 qualified net income × 9.3%). The K-1 reports a $46,500 PTE credit.

• PolicyEngine: ca_agi reflects $500,000 of partnership income, and ca_income_tax has no PTE credit.
• Law: California partnership income is $546,500, and the $46,500 credit reduces tax, with any unused part carried forward.

Proposed inputs and outputs

Inputs (Person, from the owner's California K-1):

• ca_pte_elective_tax_add_back: the owner's share of elective tax the entity deducted federally (the Schedule CA adjustment).
• ca_pte_elective_tax_credit_allocated: the owner's FTB 3804-CR Part I amount, 9.3% of their share of qualified net income and guaranteed payments.
• ca_pte_elective_tax_credit_carryover_in: prior-year FTB 3804-CR line 5.

Outputs (TaxUnit):

• ca_pte_elective_tax_credit: FTB 3804-CR line 4, limited to tax (including below TMT).
• ca_pte_elective_tax_credit_carryover_out: line 5.

Questions before a PR

1. Carryovers. Should the carryover be an input-only amount, as Limit investment interest deductions under §163(d) and Form 4952 #9977 does for Form 4952 (prior-year disallowed interest in; unused amount exposed as an output; no cross-year propagation)? Or is there a preferred cross-year pattern? The five-year expiry would need an age-of-credit breakdown if carried automatically.
2. Credit ordering. Where should the credit sit among California's nonrefundable credits (the Schedule P Part III ordering)? Its TMT exception also needs placing.
3. Add-back. A separate ca_additions source, or a California partnership/S-corp income adjustment?
4. Years. 2021–2025 under AB 150 / SB 113 (R&TC 17052.10; Part 10.4, §§ 19900–19906). Also 2026–2030 under SB 132 (R&TC 17052.11; Part 10.4.1, § 19910 et seq.), including its 12.5% credit reduction when the June 15 prepayment is missed. Is one variable with year-specific parameters acceptable?

Sources

• R&TC 17052.10 (credit, 2021–2025); R&TC 17052.11 (credit, 2026–2030).
• R&TC Part 10.4, § 19900 et seq. (AB 150, Stats. 2021; SB 113, Stats. 2022). R&TC Part 10.4.1 (SB 132, Stats. 2025).
• 2025 FTB 3804-CR and instructions: "This credit can reduce regular tax below tentative minimum tax"; "the unused credit may be carried over to reduce the tax for five years or until exhausted".
• FTB 3804 instructions (the entity's election and the 9.3% rate).
• FTB, Help with PTE elective tax: "If the qualified entity deducts the PTE elective tax for federal purposes, the amount of the PTE elective tax that was deducted must be added back for California purposes in computing the qualified entity's California net income."