Who can make the PTET election?

California S-corporations and partnerships (including multi-member LLCs taxed as partnerships) with at least one qualified taxpayer who is a shareholder or partner. 'Qualified taxpayers' are individuals, trusts, and estates — not C-corps. If all owners are qualified taxpayers, the election generally makes sense.

Is the PTET election mandatory?

No — it's optional. But for most California S-corp and partnership owners who are above the SALT cap on their personal return ($10,000 in combined state and local taxes), electing almost always saves money. The math needs to be confirmed with your CPA, but the break-even is rarely in question for profitable California businesses.

What happens to the California income tax on my personal return if the entity already paid it?

You get a credit on your California personal return (Form 3804-CR) equal to the PTET paid on your behalf. This prevents double taxation — the entity pays the state tax (getting a federal deduction), and the owner's California return is offset with a credit. The credit is refundable to the extent it exceeds your California tax liability.

Can a single-member LLC make the PTET election?

No. Single-member LLCs are disregarded for both federal and California purposes, so the owner pays taxes directly. The PTET election is only available to S-corps, partnerships, and multi-member LLCs taxed as partnerships.

What if we miss the June 15 deadline?

There's no late election option. The California PTET requires both the election and the first installment payment by June 15. If you miss this deadline, you cannot make the PTET election for that year. This is a hard deadline — add it to your calendar now and confirm with your CPA by May.

Does the PTET election affect the QBI deduction?

Yes — the PTET payment is a deduction at the entity level, which reduces ordinary business income flowing to the owners. This could reduce the QBI deduction base for pass-through owners. Your CPA needs to model both the PTET savings and any QBI reduction to confirm the net benefit.

California tax

California's Pass-Through Entity Tax Election: How S-Corps and Partnerships Bypass the SALT Cap

The AB 150 PTET election lets California S-corps and partnerships pay state income tax at the entity level — making it federally deductible and effectively bypassing the $10,000 SALT cap. How it works and when to elect.

Written by Matt Reese, CPA · 6 min read · Published April 2026·Share on LinkedIn

Key Takeaways

The PTET election allows S-corps and partnerships to pay California income tax at the entity level, where it's fully deductible as a business expense on the federal return — bypassing the $10,000 SALT cap.
The tax rate is 9.3% on California-source income. The federal deduction saves owners roughly $2.70 for every $10 of California income tax paid through the election (at the 27% bracket).
Election deadline: June 15 of the tax year (with an estimated payment due at election). Mandatory prepayment requirement makes late election impossible after Q2.
Owners receive a California tax credit equal to the PTET paid — so there's no double-taxation at the owner level.

The SALT cap problem for California business owners

The 2017 Tax Cuts and Jobs Act capped the federal deduction for state and local taxes (SALT) at $10,000 per year. For California business owners — where state income tax alone can exceed $50,000 on a profitable year — this was a significant change. Tens of thousands of dollars in California taxes that were previously federally deductible were no longer deductible.

California’s AB 150 PTET election, available since tax year 2021, is the most significant workaround for California pass-through business owners. It doesn’t eliminate the SALT cap — it routes the California tax payment through the entity, where it’s deductible as a business expense without any cap.

The SALT cap applies to personal deductions. It doesn’t apply to business expenses. The PTET election routes California income tax through the entity — where it’s a business deduction, not a Schedule A itemized deduction.

How the PTET election works

Here’s the mechanics step by step:

The S-corp or partnership makes an annual election to pay California income tax at the entity level
The entity pays 9.3% California income tax on California-source income (taxable income allocated to qualified owners)
This payment is a deductible business expense on the entity’s federal return (Form 1120-S or 1065), reducing income flowing to owners
Owners receive a California credit (Form 3804-CR) equal to the PTET paid on their behalf, eliminating double-taxation at the personal level

The net result: California state taxes get a federal deduction — which was the goal.

How much does it actually save?

PTET election savings — S-corp owner with $300,000 California income

California income subject to PTET$300,000

PTET paid by entity (9.3%)$27,900

Federal deduction value (27.9% effective rate)$7,784 federal tax saved

California credit on personal return (9.3% × $300k)−$27,900 California tax offset

Net benefit: federal deduction without California increase≈ $7,784 per year

— Without PTET (SALT cap in effect)

SALT deduction claimed$10,000 (capped)

California taxes paid but not federally deductible$17,900+ not deductible

Federal tax cost of lost deduction (at 28% rate)≈ $5,012 in lost savings

The PTET election saves roughly $5,000–8,000 per year for a California S-corp owner at $300k income. At $500k income, the savings are proportionally larger. The election costs essentially nothing to make if done on time.

Who benefits most

Owner profile	PTET benefit	Notes
S-corp owner, $200k+ California income	Strong — typically $4,000–15,000/year in federal savings	Most common use case; CPA should model annually
Partnership with individual partners	Strong — same economics apply	Each partner's share reduces their SALT exposure
S-corp, all income below SALT cap ($10k)	Minimal — SALT cap not an issue	If you're already deducting all state taxes, PTET adds complexity without much benefit
S-corp with C-corp shareholder	Partial — C-corps aren't qualified taxpayers	C-corp shares excluded from PTET calculation
Single-member LLC	None — not eligible	Entity treated as disregarded; owner pays taxes directly

The deadline: June 15, no exceptions

To make the PTET election for a tax year, the entity must both elect and make the first installment payment by June 15 of that year. There is no extension and no late filing option.

The required June 15 payment is either:

The greater of $1,000 or 50% of the prior year’s PTET paid (if you elected last year), or
The greater of $1,000 or 50% of the estimated current-year PTET (if electing for the first time)

The remaining balance is paid with the entity’s tax return (March 15 for calendar-year S-corps and partnerships, with extension available).

June 15 is a hard deadline — confirm by May

If your CPA hasn’t raised the PTET election by June of each year, ask. The election can’t be made retroactively. For a business generating $300k+ in California income, missing the election costs thousands of dollars in avoidable federal tax.

Impact on the QBI deduction

The PTET payment reduces entity-level income, which flows through to owners as lower K-1 income. For owners who qualify for the §199A QBI deduction, a lower K-1 income means a slightly lower QBI deduction base.

Whether this interplay reduces or eliminates the net benefit depends on your specific situation — entity type, income level, SSTB status, and whether you’re above or below the QBI income thresholds. Your CPA should model both effects together before confirming the PTET election is worth it. For most profitable California S-corps and partnerships, it is.

The refundable credit

If the California credit from PTET exceeds your California personal tax liability in a given year, the excess is refundable — you get a refund from the FTB. This is different from most California credits, which are non-refundable. It means there’s no risk of losing the credit value even in a lower-income year.

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Frequently asked

Questions owners actually ask

Who can make the PTET election?: California S-corporations and partnerships (including multi-member LLCs taxed as partnerships) with at least one qualified taxpayer who is a shareholder or partner. 'Qualified taxpayers' are individuals, trusts, and estates — not C-corps. If all owners are qualified taxpayers, the election generally makes sense.
Is the PTET election mandatory?: No — it's optional. But for most California S-corp and partnership owners who are above the SALT cap on their personal return ($10,000 in combined state and local taxes), electing almost always saves money. The math needs to be confirmed with your CPA, but the break-even is rarely in question for profitable California businesses.
What happens to the California income tax on my personal return if the entity already paid it?: You get a credit on your California personal return (Form 3804-CR) equal to the PTET paid on your behalf. This prevents double taxation — the entity pays the state tax (getting a federal deduction), and the owner's California return is offset with a credit. The credit is refundable to the extent it exceeds your California tax liability.
Can a single-member LLC make the PTET election?: No. Single-member LLCs are disregarded for both federal and California purposes, so the owner pays taxes directly. The PTET election is only available to S-corps, partnerships, and multi-member LLCs taxed as partnerships.
What if we miss the June 15 deadline?: There's no late election option. The California PTET requires both the election and the first installment payment by June 15. If you miss this deadline, you cannot make the PTET election for that year. This is a hard deadline — add it to your calendar now and confirm with your CPA by May.
Does the PTET election affect the QBI deduction?: Yes — the PTET payment is a deduction at the entity level, which reduces ordinary business income flowing to the owners. This could reduce the QBI deduction base for pass-through owners. Your CPA needs to model both the PTET savings and any QBI reduction to confirm the net benefit.

Take the next step

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Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.