The California Pass-Through Entity Tax (PTET) election has been a valuable planning tool in recent years, particularly as a workaround to the federal limitation on state and local tax (SALT) deductions. However, recent changes to both Federal and California tax law make the decision on whether to make this election more nuanced than in prior years.
What Has Changed
1. Higher Federal SALT Deduction Cap (2025–2029)
Under recent federal legislation, the state and local tax deduction (“SALT” deduction) cap has increased to $40,000 for tax years 2025 through 2029, with a phase-down, but not below $10,000, for taxpayers with adjusted gross income (“AGI”) above $500,000 ($250,000 for married filing separately). For taxpayers expecting AGI below $500,000, this higher cap may reduce or eliminate the primary benefit of making the PTET election.
That said, PTET can still offer advantages because taxes paid at the entity level reduce Federal adjusted gross income (AGI), rather than merely increasing itemized deductions.
- AGI reduction is especially valuable because many Federal tax benefits, credits, and phase-outs are tied directly to AGI.
- California also uses federal AGI for several deduction thresholds, so a lower Federal AGI can produce state-level benefits as well.
2. California PTET Extended Through 2030
California’s PTET regime (originally enacted under AB 150) has been extended through the end of 2030, providing continued planning certainty for pass-through entities.
Important New Modification: SB 132 (Effective 2026)
Beginning with the 2026 taxable year, California law (SB 132) allows taxpayers to continue to make the PTET election even if the June 15 payment is missed. However:
- The PTET credit is reduced by 12.5% of the June 15 payment shortfall.
- For taxpayers who already fully deduct their SALT payments under the new $40,000 cap, this reduction may eliminate much of the economic benefit of the election.
Cash Flow Considerations
The timing of payments can also influence whether the PTET election makes sense:
- No prior year election may benefit from favorable timing:
- Only a $1,000 payment is required by June 15 of the current year
- The remaining balance is due with the entity’s tax return
- This can reduce estimated tax payments during the year and preserve cash flow
- Prior year election may face a larger upfront requirement:
- The June 15 payment is generally 50% of the prior year’s PTET liability
- If prior-year income was significantly higher, this can result in overpayment and a temporary cash flow strain
Additionally, PTET payments made after December 31 are not deductible until the following tax year, which can affect the timing of the federal benefit.
Ask Realize for Help with PTET Elections
The California Pass-Through Entity Tax can still provide meaningful tax savings; however, there are many nuances to this election that make it worthwhile to discuss with your Realize team. We would be happy to discuss your situation and help determine whether the PTET election continues to make sense for you.
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