If you own a California S corporation, partnership, or LLC taxed as a partnership, you were probably told the California pass-through entity elective tax was ending after 2025.
It did not. California extended it through 2030.
That advice was reasonable when it was given, but two things have changed since. The federal SALT deduction limit was increased substantially for 2025 through 2029 rather than simply expiring, and California extended its PTE elective tax through 2030. The June 15 prepayment rule, which used to eliminate the election if it was missed, was also softened beginning in 2026.
Both affect the entity return you are about to file. Here is where things actually stand.
How the California Pass-Through Entity Elective Tax Works
The California pass-through entity elective tax exists because of a federal limit.
Individuals can only deduct so much in state and local taxes on a federal return. For years that limit was $10,000, which is not much once California income tax and property tax are added together.
The PTE election can effectively work around the individual SALT limitation. Instead of the owners deducting California income tax personally, the entity pays California tax at the entity level at a rate of 9.3% of qualified net income. That entity-level payment is generally deductible for federal income tax purposes at the entity level, so it is not subject to the individual SALT deduction cap in the same way.
The owners then claim a credit on their California returns for their share of what the entity paid.
The result, when the credit is fully usable, can be a federal deduction while the owner receives a corresponding California credit.
Why Owners Think the CA PTET Expired After 2025
The original program was written with an end date. It applied to tax years 2021 through 2025 and was tied to the federal deduction limit, which was itself scheduled to disappear at the end of 2025.
For most of 2025, nobody could say with confidence what would happen next. A lot of advisors told clients to plan for the election ending, which was reasonable at the time.
Then two things happened. The federal SALT deduction limit was increased substantially for 2025 through 2029 rather than allowed to expire, and California extended the elective tax for five more years, covering tax years 2026 through 2030.
So, the election is available for 2026. It will be available for 2027. Owners who stopped thinking about it last year should start again.
How the June 15 PTET Prepayment Rule Changed for 2026
This is the part that catches people, and it used to be unforgiving.
Under the old rules, an entity that wanted to elect had to make a prepayment by June 15 of the tax year, equal to the greater of $1,000 or half of the prior year’s elective tax. Miss that date, or send too little, and the election was simply unavailable for the entire year. There was no way to fix it.
That changed for 2026 onward. Missing or underpaying the June 15 prepayment no longer disqualifies the entity. The election can still be made.
There is a cost. Each owner’s credit is reduced by 12.5% of their share of the amount that should have been paid in June. That is a real number, not a rounding error, but it is far better than losing the election entirely.
If your entity missed or underpaid the June 2026 prepayment, the election is still available for this year, subject to the reduced-credit rules. That is a conversation worth having now rather than in March, when the entity return is being prepared.
Is the PTE Election Still Worth It Now That the SALT Cap Is Higher?
This is where it stops being a filing question and becomes a planning one.
For 2026, the federal SALT deduction limit is $40,400, or $20,200 for married taxpayers filing separately. The limit begins to phase down once modified adjusted gross income exceeds $505,000, or $252,500 for married filing separately, but it cannot fall below $10,000. Under current law, the cap returns to $10,000 beginning in 2030.
A higher limit reduces the value of the election for some owners. It does not eliminate it.
The election tends to still make sense when:
- The owner’s California tax alone exceeds the federal deduction limit, which is common at higher income levels.
- The owner’s income is high enough that the deduction phases down.
- Property tax on a California home already consumes much of the available deduction before income tax is considered.
It tends to matter less when the owner’s total state and local taxes comfortably fit under the limit.
There are also limits on the credit itself. It is nonrefundable, it interacts with other California credits and with the tentative minimum tax, and in some situations part of it carries forward rather than being used in the year it is generated.
None of that is a reason to skip the election. It is a reason to run the numbers rather than assume.
Who Can Make the California PTE Election, and Who Cannot?
Not every business qualifies.
Eligible entities generally include S corporations, partnerships, and LLCs treated as partnerships.
Generally not eligible are sole proprietors, disregarded single-member LLCs, publicly traded partnerships, and entities permitted or required to be included in a combined reporting group.
There is also a consent requirement. Only the income of owners who consent is included in the calculation, and owners who are themselves partnerships generally cannot consent. In a firm with several partners, that means the decision has to be made together rather than by one person.
The election is annual. You can elect for one year and skip the next if the math changes. Once made for a given year, though, it cannot be withdrawn.
FTB Form 3804, Form 3893 and the Dates That Matter
- Form 3804 makes the election and calculates the tax. It is filed with the entity return.
- Form 3893 is used for the prepayment and the balance payment.
- Form 3804-CR is how each owner claims the credit on their personal California return.
- The election has to be made on a timely filed original return. It cannot be added to an amended return later.
- The next prepayment date is June 15, 2027, for the 2027 tax year.
The sequence spans two filing seasons, which is part of why it gets dropped. The decision for one year is funded in June, elected the following spring, and claimed by the owners on returns filed at the same time.
What to Review Before Your 2026 Entity Return Is Filed
Three questions are worth answering now.
Did the entity make a June 2026 prepayment, and was it the right amount? If yes, the election is straightforward. If no, it is still available with a reduced credit, and someone should quantify what that reduction costs.
Do the owners want it? Run the comparison for each owner rather than assuming the answer is the same for everyone. Owners in different income positions can reach different conclusions about the same entity.
What happens next year? If the election makes sense for 2026, the June 15, 2027 prepayment should go on the calendar now, with the amount calculated rather than guessed.
Why the PTE Election Is Worth Reviewing Every Year
The pass-through entity election is one of the few California-specific planning items that produces a clear federal benefit, and it is also one of the easiest to lose track of, because the decision and the filing sit almost a year apart.
It is worth reviewing annually rather than treating as a box that was ticked once.
Alumbra CPA works with California business owners on exactly this kind of decision, including partners at legal firms and consulting firms, where the election often has the largest effect. You can read more about our business and corporate tax services, or get in touch to review whether the election makes sense for your entity this year.
