California Pass-Through Entity Tax — Updated for 2026

Last updated: March 2026. This post has been substantially revised to reflect SB 132, signed June 27, 2025, which extended and modified the California PTE election through 2030.

If you own a California S corporation, partnership, or LLC taxed as a partnership, the Pass-Through Entity (PTE) elective tax remains one of the most valuable tax planning tools available to you — and it just got a five-year extension.

Here's what you need to know for 2026 and beyond.

What the PTE election is and why it matters

California's PTE elective tax is a workaround to the federal $10,000 cap on state and local tax (SALT) deductions — the limit introduced by the 2017 Tax Cuts and Jobs Act. Instead of individual owners deducting their California state income tax on their federal returns (subject to the cap), the entity pays California tax at the entity level at a rate of 9.3% of qualified net income. That entity-level payment is fully deductible as a business expense federally, bypassing the individual SALT cap entirely. Each qualifying owner then receives a nonrefundable California tax credit equal to their share of the PTE tax paid, which can be carried forward up to five years.

The net effect for many business owners in California has been a meaningful reduction in combined federal and California tax — particularly for those with higher incomes and larger state tax liabilities.

The 2026 extension — what SB 132 changed

The original PTE election was set to expire after the 2025 tax year. Governor Newsom signed Senate Bill 132 on June 27, 2025, extending the program through the 2030 tax year. The election is now available for tax years 2026 through 2030.

SB 132 also changed the prepayment rules in an important way. Under the original rules (2022–2025), missing the June 15 prepayment deadline completely disqualified an entity from making the PTE election for that year — a harsh penalty that caught many business owners off guard. Under the new rules for 2026 and beyond, missing or underpaying the June 15 prepayment no longer disqualifies the election. You can still elect in. However, there is a cost: the credit available to each owner is reduced by 12.5% of their proportionate share of the underpaid amount. In practical terms, making the June 15 prepayment in full still maximises the benefit. The new rule simply removes the cliff — an underpayment no longer forfeits everything.

One new wrinkle to factor in for 2026

The One Big Beautiful Bill Act temporarily increased the federal SALT deduction cap to $40,000 for most taxpayers through 2029 (with a phase-down for high earners and a reversion to $10,000 in 2030). For business owners with adjusted gross income under $500,000, this higher federal SALT cap reduces — but does not eliminate — the advantage of the PTE election, since more of their California state taxes may now be deductible at the individual level anyway. For higher-income owners, the benefit of the PTE election remains substantial. This is worth running the numbers on with your CPA each year rather than assuming the election is automatically beneficial.

Key deadlines for the 2026 tax year

• June 15, 2026 — prepayment due (greater of $1,000 or 50% of prior year's PTE tax paid). Missing this reduces your credit by 12.5% of the shortfall but no longer disqualifies the election.

• March 17, 2027 — second payment and election filing deadline for calendar-year entities (original return due date, without extensions).

Who qualifies

Qualifying entities include S corporations, partnerships, and LLCs taxed as partnerships. Owners who are individuals, trusts, estates, or certain disregarded single-member LLCs subject to California personal income tax are qualified taxpayers eligible for the credit. All consenting owners are bound by the election for that tax year.

The bottom line

The California PTE election remains a valuable planning tool for most pass-through business owners with significant California income — particularly those with higher adjusted gross incomes where the federal SALT cap still bites. The five-year extension through 2030 provides planning certainty, and the softened prepayment rules for 2026 onward reduce the risk of inadvertently losing the benefit entirely.

As always, confirm the specifics with your CPA or tax preparer before acting — the right answer depends on your entity structure, ownership mix, income level, and prior year PTE payments.

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