California PTET Election 2026: SB 132 Rules, the June 15 Payment, and the 9.3% Tax

A California design studio set up as an S-corp asked me last month whether the pass-through entity tax was still worth the paperwork now that the federal SALT deduction is bigger. Fair question. For a high-earning California owner the election still pays, but the rules changed for 2026 in a way that quietly helps and quietly bites. The owner below is theoretical, not an actual EntityIQ client, but the mechanics and the dollars are real.

What the California PTET actually does

California's pass-through entity elective tax lets your business pay your state income tax at the entity level, where it is fully deductible, instead of at the owner level, where the federal SALT cap chokes the deduction. Individuals have been limited on how much state and local tax they can write off on a federal Schedule A since 2018, and the cap sat at $10,000 for years under IRC §164(b)(6). The One Big Beautiful Bill Act raised it to $40,400 for 2026, but that larger cap phases back down once modified adjusted gross income passes $505,000, and it drops to $10,000 again in 2030. For a California owner paying a state rate above 9%, the cap strands a lot of otherwise deductible tax.

The workaround moves the tax off the individual return. The entity pays a 9.3% elective tax that is an ordinary business expense on the federal 1120-S or 1065, outside the SALT cap, and the owner claims a matching California credit so the state tax is never paid twice. The IRS blessed this design in Notice 2020-75, and California wrote its version into the Revenue and Taxation Code at Part 10.4.1, beginning with §19900.

It almost expired, then SB 132 extended it

California first enacted the elective tax in AB 150 in 2021 and refined it with SB 113 in 2022, both written to sunset after 2025 to match the original expiration of the federal SALT cap. When Congress made the cap permanent in 2025, California followed. Governor Newsom signed SB 132 on June 27, 2025, extending the pass-through entity elective tax for taxable years beginning on or after January 1, 2026, and before January 1, 2031. So the California PTET is still available in 2026, and it is scheduled to run through 2030. SB 132 also created a new credit section, R&TC §17052.11, for the extended years, which mirrors the original §17052.10 credit that covered 2021 through 2025.

The June 15 payment and the new 12.5% haircut

Here is the change that matters most for 2026. California requires an electing entity to make a prepayment on or before June 15 of the tax year, equal to the greater of $1,000 or 50% of the elective tax it paid the prior year, with the balance due by the original return due date. Under the old rules, missing that June 15 payment by even a dollar killed the election for the entire year.

SB 132 softened it. For tax years beginning on or after January 1, 2026, an entity can still make a valid election even if the June 15 payment is late or short. If the entity does not pay the required amount by June 15, each owner's pass-through entity tax credit is reduced by 12.5% of that owner's share of the amount that was due but not paid. So an underpayment no longer erases the deduction, but it does shave the credit, and 12.5% of a large shortfall is real money. The practical advice has not changed. Fund the June 15 payment in full and skip the penalty entirely.

The 9.3% rate does not cover your whole California tax

The elective tax is a flat 9.3% of qualified net income, the total of each consenting owner's distributive share. That 9.3% is the middle of California's individual brackets, not the top. A high earner in California can face a marginal rate of 10.3% up to 13.3% once the 1% mental health services tax on income over $1 million is added. Because the credit only returns the 9.3% the entity paid, the slice of your California tax above 9.3% stays on your personal return, where the SALT cap still limits it. Any calculator that treats the California PTET as covering your entire state bill is overstating the benefit.

Put numbers on it. Picture a single California owner whose S-corp allocates $700,000 of income to her, with combined state and local taxes already well past the cap. The figures are illustrative 2026 amounts and are rounded.

Without the election she pays about $67,700 of California income tax personally, but her SALT deduction is pinned near the $10,000 floor because her income sits above the $505,000 phasedown. Elect the PTET and the entity's $65,100 payment becomes a federal deduction that cuts the income on her K-1. At a 37% rate that is worth about $24,087, or roughly $20,400 net of the SALT deduction she would have taken anyway. She claims the $65,100 back as a California credit, so only the $2,600 above the 9.3% rate stays capped.

How to make the election

The election is annual, irrevocable for the year once made, and it is made on a timely filed original return. You elect by filing Form FTB 3804, the Pass-Through Entity Elective Tax Calculation, with the entity's return, Form 100S for an S-corp or Form 565 or 568 for a partnership or LLC taxed as one. Payments go in with Form FTB 3893, the payment voucher. A qualified entity is an S-corp, partnership, or LLC treated as a partnership or S-corp that is doing business in California. A disregarded single-member LLC does not qualify, nor does a publicly traded partnership or an entity in a combined reporting group.

Only certain owners can be included. A qualified taxpayer is an individual, estate, trust, or fiduciary that consents to be in. Corporate partners and owners that are themselves partnerships are excluded. An owner who does not consent is left out of the calculation without blocking the election for the others, so the entity tax rarely equals a simple 9.3% of total profit.

Claiming the credit

Each consenting owner claims the credit on Form FTB 3804-CR, filed with the California personal return, equal to their share of the elective tax the entity paid, now authorized by R&TC §17052.11 for 2026 and later years. The credit is nonrefundable, but any amount that exceeds your California tax for the year carries forward for up to five years, so a large credit in a high-income year is not lost. Since SB 113, the credit can also reduce your California tax below the tentative minimum tax, and it is not subject to the $5 million business credit cap for tax years 2024 through 2026.

If you are still weighing the S-corp election before stacking a state pass-through tax on top, run your numbers first with the EntityIQ S-Corp tax calculator. For the federal side of the same strategy and the issues that come with a California S-corp, see our guides on how the PTET works around the SALT cap and the pitfalls of electing S-corp status in California.

This article is educational and is not legal or tax advice. The rates and thresholds above are 2026 figures, and the owner is theoretical. California's pass-through entity tax rules change often, so confirm the current deadlines and amounts on the Franchise Tax Board site and consult a qualified California tax professional before you elect.