For the past several years, California’s Pass-Through Entity (PTE) elective tax has been one of the most popular tax-saving moves for S-corporations, partnerships, and LLCs. But federal law changed in 2025, and that changes the math for 2026. If you’ve been electing the PTE tax — or wondering whether you should — here’s an up-to-date look at how it works now and whether it’s still worth it for your business.
A quick recap: what the PTE elective tax does
California’s PTE elective tax was created by AB 150 as a workaround to the federal cap on state and local tax (SALT) deductions. In short, a qualifying pass-through entity can elect to pay California income tax at the entity level — currently a 9.3% rate on qualified net income — which produces a federal business deduction. That deduction effectively moves state tax that owners couldn’t fully deduct on their personal returns (because of the SALT cap) into a fully deductible business expense.
What changed in 2026: a bigger SALT cap
The 2017 Tax Cuts and Jobs Act capped the federal SALT deduction at $10,000 — the very limit the PTE election was designed to sidestep. Federal legislation enacted in 2025 raised that cap to $40,000 for 2026 (subject to a phase-down for higher-income taxpayers, generally those with modified AGI above roughly $500,000).
California kept the PTE election — through 2031
Importantly, California did not end the program. Under SB 132, the state extended the availability of the PTE elective tax for taxable years 2026 through 2031. So the tool is still on the table — the question is simply whether it benefits you under the new federal rules.
So is it still worth electing?
It depends on your income and tax picture. As a general framework:
- Likely still valuable: high-income owners whose state tax liability comfortably exceeds the $40,000 SALT cap, and taxpayers whose deduction is reduced or phased out at higher income levels — the PTE deduction can still capture state tax the personal SALT deduction can’t.
- May no longer help much: owners (especially joint filers under the ~$500,000 income range) whose total state taxes now fit within the larger $40,000 cap — the personal deduction may already absorb most of it.
The only way to know is to model both scenarios for your specific numbers — with and without the election — including the interaction with your personal return. This is exactly the kind of analysis we run for our California clients before any election deadline.
The June 15 prepayment deadline still matters
If you do plan to elect, timing is critical. California requires a prepayment by June 15 of the tax year to preserve eligibility, with specific rules about the minimum amount due. Miss it, and you can lose the election for that year entirely. The full election and final payment then follow with the entity’s return. Because the rules are unforgiving on timing, this is not a decision to leave until tax season.
How to decide
- Project your 2026 income at both the entity and personal level.
- Compare your expected state tax to the $40,000 SALT cap and check whether you’re in the high-income phase-down range.
- Model the election both ways to see the actual federal benefit, if any.
- Calendar the June 15 prepayment if the election makes sense.
We handle this analysis, the prepayment, and the filing as part of our California tax planning for service and software businesses.
Frequently asked questions
Is California’s PTE elective tax still available in 2026?
Yes. SB 132 extended the PTE elective tax through the 2031 tax year. The entity-level rate remains 9.3% on qualified net income.
Did the SALT cap really change?
Yes. Federal legislation enacted in 2025 raised the SALT deduction cap from $10,000 to $40,000 for 2026, with a phase-down for higher-income taxpayers. This reduces the extra benefit the PTE election provided for some owners.
Who still benefits most from the PTE election?
Generally, higher-income owners whose state tax liability exceeds the $40,000 cap, or whose personal SALT deduction is reduced by income-based phase-downs. Lower- and middle-income joint filers may find the larger cap already covers most of their state tax.
When is the deadline to elect?
California requires a prepayment by June 15 of the tax year to preserve eligibility, with the final election and payment due with the entity return. Confirm the current-year amounts and rules before relying on them.
This article is general information, not tax advice. SALT cap amounts, phase-down thresholds, and PTE rules are complex and change — confirm current figures with the California Franchise Tax Board or your CPA before acting.
