California's PTE Election in 2026: How It Works Now

California's elective pass-through entity tax, usually called the PTE tax, is one of the most useful planning tools for owners of S corporations and partnerships. It was scheduled to end after 2025. Instead, California extended it through 2030 and softened one of its strictest rules.

Here is how the election works now, and how we decide whether it makes sense for a business.

What the election does

Owners of S corporations and partnerships normally pay California income tax on their share of the business income on their personal returns. Those state taxes count toward the federal cap on state and local tax deductions, often called the SALT cap.

When a business makes the PTE election, it pays California tax of 9.3 percent on the qualified net income of the owners who consent. The business deducts that payment on its federal return, which lowers the income that flows through to the owners. Each owner then claims a California credit for their share of the tax the business paid. Credit an owner cannot use right away can be carried forward for up to five years.

The result is that state tax that would have been capped on the owner's personal return becomes a business deduction instead.

Who can elect

The election is open to S corporations and partnerships, including LLCs taxed as either one. Publicly traded partnerships and businesses required to file as part of a combined reporting group cannot elect.

The tax is figured only on the income of qualified owners: individuals, estates, and trusts subject to California personal income tax, including single-member LLCs they own that are disregarded for tax purposes. Each owner decides whether to consent. An owner who does not consent is left out of the calculation and does not receive the credit.

The payment rules for 2026

The election is made on a timely filed original return, using Form FTB 3804. It cannot be made on an amended return, and once made it cannot be revoked.

Payment comes in two parts. The first is due June 15 of the tax year and is the greater of $1,000 or 50 percent of the prior year's PTE tax. The balance is due by the original due date of the return, which is March 15 for calendar-year S corporations and partnerships.

Before 2026, missing or shorting the June 15 payment meant the business could not elect for that year. Starting with 2026, the business can still elect. The cost is a smaller credit. Each owner's credit is reduced by 12.5 percent of their share of the June 15 amount that went unpaid. For example, if a business should have paid $20,000 on June 15 and paid nothing, an owner with a 50 percent share would lose $1,250 of credit, which is 12.5 percent of $10,000.

Timing decides which federal return gets the deduction

The federal deduction generally belongs to the year the business actually pays the tax. A business that pays the balance of its 2026 PTE tax by December 31, 2026 generally deducts it on its 2026 federal return. If it waits and pays in March 2027, the deduction moves to 2027.

That choice matters most when income is uneven from year to year. We usually want the deduction in the higher-income year, and we want to be sure the business can make the payment without straining its cash.

The SALT cap changed, and that changes the math

The 2025 federal tax law raised the SALT cap. For 2026 the cap is $40,400, or $20,200 for married couples filing separately. But the higher cap shrinks as income rises. Once modified adjusted gross income passes $505,000, the cap is reduced by 30 percent of the excess, down to a floor of $10,000. At about $606,000 of income, the cap is back to $10,000.

That splits owners into groups. An owner well below $505,000 who itemizes may now be able to deduct most or all of their state income and property taxes personally, which makes the election worth less. An owner above about $606,000 is back at the $10,000 cap, and the election can be worth as much as it was before. Owners in between need a projection.

When the election may not help

The election is not automatic, and it is not right for every business. It may add little when the owners can already deduct all of their state taxes personally under the higher cap, or when the business would struggle to fund the payments. It also adds work: the June payment, the election on the return, and tracking which owners consented.

What we look at

For each business, we compare the owners' federal tax with and without the election, using projected 2026 income. We check each owner's income against the SALT cap thresholds, confirm whether the June 15 payment was made in full, and decide whether a December payment makes sense. Then we put the June 15, 2027 payment on the calendar so next year's election starts on the right foot.

Book your planning call

If your business has not looked at the PTE election this year, book a time with our team at calendly.com/kirkcole/15-minute-meeting. December is the last chance to make a 2026 payment that lands on this year's federal return.

This article is general information, not tax advice for your situation. Tax rules change, and the right move depends on your facts.