California's Pass-Through Tax in 2026: Is It Still Worth Paying?
If you own part of a California S corporation or partnership, you may have heard that the pass-through entity (PTE) elective tax can save federal tax. For many owners it still does in 2026, especially when income pushes the federal SALT cap toward its $10,000 floor. It matters less if your total state and local taxes already fit under the $40,400 cap. This year a missed June 15 payment also no longer blocks the election; it reduces the credit instead.
Short answer
For many California S corporation and partnership owners, the PTE elective tax generally still makes sense in 2026, and it matters most for owners whose income pushes their federal SALT cap down toward $10,000. It is less compelling for owners whose total state and local taxes already fit under the $40,400 cap and who itemize. The 2026 rules also soften the penalty for missing the June 15 payment, which changes the decision for entities that missed it this year.
Key facts and figures
- California's pass-through entity (PTE) elective tax continues for 2026 through 2030 at 9.3% of qualified net income (FTB, verified Oct 13, 2026). The 2030 end date depends on the federal SALT cap (IRC section 164(b)(6)) staying in place (R&TC section 19916, verified Oct 15, 2026).
- New for 2026: a missed or short June 15 payment no longer blocks the election. Instead, each consenting owner's credit is reduced by 12.5% of their share of the unpaid amount (FTB, verified Oct 13, 2026).
- The federal $40,400 SALT cap shrinks for MAGI above $505,000 and reaches the $10,000 floor at about $606,333 of MAGI (Pub. L. 119-21 §70120, verified Oct 13, 2026). High earners generally gain the most from the entity-level deduction.
- Under IRS Notice 2020-75, which taxpayers may rely on until regulations are issued, the entity deducts the payment for the year it is paid, so a payment made by December 31, 2026 is generally the one that counts on 2026 federal returns (Notice 2020-75, verified Oct 15, 2026).
How the election works
A qualified entity (a partnership or S corporation, excluding publicly traded partnerships and entities required or permitted to be in a combined reporting group) elects annually by filing FTB 3804 with a timely filed original return. The election cannot be made on an amended return (FTB, verified Oct 15, 2026). The election binds all owners, consenting or not, and is irrevocable for the year. Only owners who consent have their share of income and guaranteed payments included in qualified net income (QNI). Consent is all-or-nothing for each owner. Only individuals, fiduciaries, estates and trusts subject to California personal income tax (and their wholly owned disregarded SMLLCs) can be qualified taxpayers. Corporate and partnership owners cannot, and a negative K-1 total produces no QNI and no credit (FTB FAQ; FTB 3804 instructions, verified Oct 15, 2026). Each consenting owner then claims a nonrefundable California credit on FTB 3804-CR.
Payment schedule for 2026
- June 15, 2026: the greater of $1,000 or 50% of the PTE elective tax paid for 2025 (FTB, verified Oct 13, 2026).
- Balance: by the due date of the original return without extensions. For calendar-year S corporations and partnerships, California returns are due on the 15th day of the 3rd month after year end, which is March 15, 2027 (FTB due dates, verified Oct 13, 2026).
- Payments can be made through FTB Web Pay, electronic funds withdrawal in tax software that supports it, or the FTB 3893 voucher. Electronic payments must be designated as PTE payments, and PTE payments cannot be combined with the entity's other tax payments (FTB FAQ, verified Oct 15, 2026).
Why the federal SALT changes matter
For 2026, the individual SALT deduction is capped at $40,400 ($20,200 married filing separately). The cap is reduced by 30% of MAGI above $505,000, but not below $10,000 (Pub. L. 119-21 §70120, verified Oct 13, 2026). For married filing separately, the phase-down starts at $252,500 and the floor is $5,000 (reached near $303,167) (§70120, verified Oct 15, 2026). See our OBBBA 2026 federal vs. California guide for the full rule.
Notice 2020-75 announced that Treasury and the IRS intend to issue regulations allowing a partnership or S corporation to deduct qualifying entity-level income tax payments, and that such payments are not subject to the owner's SALT limit. Taxpayers may rely on the notice until regulations are issued. As of this writing none have been, and the 2025 federal tax act was enacted without proposals that would have limited the deduction (IRS Notice 2020-75, verified Oct 15, 2026). The Treasury and IRS 2026-2027 Priority Guidance Plan, released September 29, 2026, lists no project on section 164 or this notice (IRS Priority Guidance Plan, verified Oct 15, 2026).
Because the deduction happens above the line, it is also generally outside the new 2/37 limit on itemized deductions that applies to taxpayers in the 37% bracket. The PTE deduction also reduces K-1 income, so it lowers AGI and MAGI. Run the cap test on post-election MAGI. Because the entity deduction lowers AGI, an owner inside the phase-down range may also see a higher remaining individual cap.
Illustrative examples
Example 1 (illustrative numbers): a high-income S corporation owner
Assume one California-resident shareholder filing jointly with the standard deduction, QNI of $600,000, and MAGI of about $800,000 before the election, which gives taxable income of about $767,800. The $55,800 deduction lowers MAGI to about $744,200, still above the $606,333 point where the cap reaches its floor, so the individual SALT cap stays at the $10,000 floor.
- PTE elective tax: $600,000 × 9.3% = $55,800.
- Federal: the $55,800 reduces K-1 income. Joint-filer taxable income of about $767,800 is just under the $768,700 start of the 37% bracket, so the reduction falls in the 35% bracket, which is roughly $19,530 of federal tax before any section 199A effect (Rev. Proc. 2025-32, verified Oct 15, 2026). A single filer at this income would already be in the 37% bracket, which starts at $640,600, where the same reduction is worth about $20,646.
- California: the deduction is added back for California, and the owner claims a $55,800 credit against California tax.
Without the election, most of that California tax would generally not be deductible federally because of the $10,000 floor.
The PTE deduction also reduces qualified business income (QBI), so a section 199A deduction would shrink. If it were fully available, it would fall by 20% of $55,800 ($11,160), cutting the net federal benefit to about $15,624 ($19,530 minus $3,906).
Example 2 (illustrative numbers): the June 15 payment was missed
Assume the entity paid $40,000 of PTE elective tax for 2025, so the required June 15, 2026 payment was $20,000, and it paid nothing. One owner holds 100% and 2026 QNI is $500,000.
- 2026 PTE elective tax: $46,500. Credit reduction: 12.5% × $20,000 = $2,500.
- Owner's California credit: $46,500 minus $2,500 = $44,000.
- Federal value of the entity deduction at an assumed 35% rate: about $16,275, before any section 199A effect.
In this illustration the election is generally still worth considering, because the federal benefit exceeds the $2,500 reduction. With several owners, each consenting owner's "pro rata share" of the unpaid amount follows that owner's share of QNI, not simply ownership percentage (FTB's own example uses QNI share) (FTB FAQ, verified Oct 15, 2026). Results depend on each owner's rates, residency and other credits.
When it may not be worth it
- Owners with MAGI under $505,000 whose total state and local taxes already fit within the $40,400 cap and who itemize may see a smaller benefit.
- Owners who are California nonresidents: QNI includes only their California-source share, and their home state's treatment of the credit should be checked.
- Entities with tight cash flow, since the entity pays the tax before owners file.
- Owners with large other credits. The FTB applies the PTE credit after the Other State Tax Credit, and when computing that credit, net tax payable is increased by any PTE credit applied first. The PTE credit may reduce tax below tentative minimum tax, but it cannot offset the 1% behavioral health services tax. The credit is nonrefundable, and the 5-year carryover survives the 2030 sunset (FTB FAQ; FTB 3804-CR instructions, verified Oct 15, 2026).
Year-end checklist for 2026
- Project 2026 QNI and each owner's post-election MAGI against the $505,000 phase-down.
- Decide whether to pay the estimated balance by December 31, 2026 to support a 2026 federal deduction.
- Collect owner consents and confirm entity type (a disregarded single-member LLC cannot elect).
- Plan the June 15, 2027 payment now: 50% of the 2026 tax, or $1,000 if greater.
Choosing or changing entity type? See LLC vs. S corp vs. C corp. For other year-end items, see our year-end checklist and the 2026 information-reporting changes.
Frequently asked questions
Is the California PTE elective tax available for 2026?
Yes. SB 132 extended the elective tax for taxable years beginning on or after January 1, 2026, and before January 1, 2031, at 9.3% of qualified net income (FTB, verified Oct 13, 2026). The 2030 end date depends on the federal section 164(b)(6) cap staying in place; the California statute becomes inoperative if that cap is repealed (R&TC section 19916, verified Oct 15, 2026).
We missed the June 15, 2026 payment. Can we still elect?
Generally yes, for 2026 through 2030. The election remains available on a timely filed original return, but each consenting owner's credit is reduced by 12.5% of their pro rata share of the unpaid June 15 amount (FTB PTE FAQ, verified Oct 13, 2026).
Do I get a federal deduction if I take the standard deduction?
Generally yes. IRS Notice 2020-75, which taxpayers may rely on until regulations are issued, says the entity deducts the payment in computing its income, and it is not counted against the owner's individual SALT cap. The benefit flows through as lower pass-through income, not as an itemized deduction (Notice 2020-75, verified Oct 15, 2026).
Can a single-member LLC make the election?
No. A disregarded entity is not a qualified entity because it is not taxed as a partnership or S corporation. A single-member LLC owned by an individual can, however, be a consenting owner of an electing partnership or S corporation (FTB, verified Oct 13, 2026).
What if the credit is more than my California tax this year?
The credit is nonrefundable. The FTB says unused credit can generally be carried over for up to 5 years, and the carryover period is not cut short by the 2030 sunset (FTB FAQ, verified Oct 15, 2026).
Talk it through
If you would like a side-by-side projection with and without the election, you are welcome to book a consultation. Our services page describes business tax planning and bookkeeping support.
Primary sources
General information, not tax or legal advice. Results depend on your facts, and law and guidance can change. Please consult a qualified professional before acting.