3 Key Changes to California’s PTE Tax Election Under SB 132

Last Updated: July 2, 2026 · Originally published July 16, 2025

Effective January 1, 2026, California is updating its Passthrough Entity Elective Tax (PTE) program under Senate Bill 132 (SB 132). These changes aim to expand access, ease prepayment rules, and fix long-standing technical gaps in the program.

What Is the PTE Elective Tax?

California’s Passthrough Entity Elective Tax regime was originally enacted as part of AB 150 in response to the federal cap on state and local tax (SALT) deductions under the 2017 Tax Cuts and Jobs Act. The PTE program allows qualifying S corporations, partnerships, and LLCs treated as partnerships to pay tax at the entity level, thereby generating a federal deduction that bypassed the individual $10,000 SALT cap.

The federal SALT deduction cap increased to $40,000 beginning in 2025, with the first affected returns filed in 2026, under the One Big Beautiful Bill Act (OBBBA). The cap is indexed to $40,400 for 2026. This reduces the value of the PTE election for many California business owners, particularly those with modified adjusted gross income under $500,000, because the higher cap may now absorb most or all of their state tax deduction directly.

The higher cap phases back down for higher earners. It drops 30 cents for every dollar of modified AGI above $500,000 ($505,000 for 2026), with a floor of $10,000. A married couple filing jointly with $600,000 of modified AGI sees the cap fall to that $10,000 floor. For owners in this range, which includes most of the high-income business owners the election was designed for, the PTE election continues to deliver meaningful federal tax savings.

Owners of the entity then claim a corresponding credit on their California income tax return, effectively preserving the full deductibility of state taxes for federal purposes. Since its inception, the program has undergone several legislative revisions to expand eligibility and address administrative complexities.

3 Key Changes Effective in 2026

1. Election Available Through 2031

SB 132 extends the availability of California’s PTE election for an additional five years. Qualified passthrough entities, including S corporations, partnerships, and certain LLCs, may now elect into the program for taxable years 2026 through 2030. For a calendar-year entity, the election is available for tax years 2026, 2027, 2028, 2029, and 2030, with the final return due in spring 2031.

The election remains contingent on the continued existence of the federal SALT deduction limitation under IRC §164(b). If Congress repeals the SALT limitation before December 1, 2031, California’s PTE program becomes inoperatiive for tax years beginning the following January 1. California’s PTE program would also terminate in the same year. However, existing unused PTE credits from prior years would still carry forward for up to five years.

The One Big Beautiful Bill Act settled the near-term fate of the federal SALT cap in July 2025. Rather than expiring, the $10,000 cap was raised to a base of $40,000 for 2025, rising 1% a year through 2029, before reverting to $10,000 for tax year 2030. Because a federal SALT limitation remains in place, California’s extended PTE election stays operative. That makes California’s coverage of tax year 2030 useful to plan around, since the federal cap is set to fall back to $10,000 in the same year.

2. Late or Insufficient Prepayments No Longer Disqualify the Election

Under prior law, a PTE had to make a prepayment by June 15 of the taxable year to be eligible for the election. The prepayment had to equal the greater of $1,000 or 50% of the prior year’s PTE tax liability.

Failure to make the full payment by June 15 (even by $1.00) disqualified the entity from making the election.

SB 132 eliminates this disqualification for tax years 2026 through 2030. Entities may now make the election even if the June 15 prepayment was late or underpaid. However, there is a penalty for late or insufficient payments: the owner’s PTE tax credit will be reduced by 12.5% of that ower’s pro rata share f the amount that was due but not paid by June 15. This operates as a penalty imposed directly on the owner’s personal credit, not the entity’s tax liability.

Example:
An entity underpays its June 15, 2026, prepayment by $20,000. Under SB 132, the individual partners or shareholders will each see their PTE credit reduced by $2,500 (12.5% of $20,000), split among the owners based on their allocable share.

This relief does not apply for the tax year 2025. Entities that missed or underpaid their June 15, 2025, prepayment remain ineligible to elect for 2025.

3. Clarification for Fiscal Year Entities

Most passthrough entities file on a calendar year, but some use a fiscal year, and SB 132 addresses how the credit is timed when an entity’s tax year does not line up with its owner’s. The practical question is which individual return year the credit belongs on.

Entering the new program, the credit is allowed on the owner’s 2026 return when the electing entity is a fiscal-year filer whose tax year begins on a different date than the owner’s. This coordinates the handoff from the prior program, which covered tax years through 2025, to the new program that begins in 2026.

The same timing rule applies at the end of the program. An entity that makes the election for a fiscal year beginning in 2030 allows its owner to claim the credit on the owner’s 2031 return, even though 2030 is the last year the election is available.

The stakes here are small in dollars but easy to get wrong. A fiscal-year owner who claims the credit in the wrong year, or who confuses the pre-2026 credit with the new one, can end up with a mismatched or delayed credit. Confirming the correct year before filing avoids an amended return later.

What Parts of California’s Passthrough Entity Tax Stay the Same in 2026?

The core of the program is unchanged. SB 132 rebuilt the framework for 2026 through 2030, but the mechanics owners work with year to year carry over from the prior version.

The elective tax rate stays at 9.3% of qualified net income. The same owners remain eligible to claim the resulting credit, including individuals, trusts, estates, and certain disregarded single-member LLCs. And the election is still optional, made anew on a timely filed return each year rather than continuing automatically. For a business owner weighing 2026, that means the decision itself is familiar even though the surrounding federal math has shifted.

Does California Conform to the OBBBA?

No. California does not conform to the One Big Beautiful Bill Act, and the higher federal SALT cap changes nothing on a California return.

California’s income tax law conforms to the Internal Revenue Code as of a fixed date, currently January 1, 2025. OBBBA was enacted July 4, 2025, so it falls outside that date, and California has not adopted any part of it.

The separation runs deeper than the conformity date. California does not incorporate the federal SALT cap at all. It allows an itemized deduction for real property taxes without that federal dollar limit, and it does not allow a deduction for state income taxes in the first place. The federal cap, whether $10,000 or $40,000, has no effect on a California return.

For a PTE filer, the federal cap and the California election answer different questions. The federal SALT cap governs what an owner may deduct on a federal Schedule A. The California PTE election governs how state tax is paid at the entity level and credited back to the owner. The 9.3% elective rate, the California income tax rates, and the credit mechanics are unchanged by anything in OBBBA. California has issued no guidance suggesting conformity to the Act is under consideration.

Is the PTE Election Still Worth It After the Higher SALT Cap?

For most high-income California business owners, yes. The answer turns on modified adjusted gross income.

Owners with modified AGI under $500,000 have the most to reconsider. The $40,000 federal SALT cap may now absorb most or all of their state income tax deduction on its own, which narrows the advantage the PTE election used to provide. For these owners, the election is worth recalculating for 2025 and 2026 as part of annual tax planning for the business rather than renewing on autopilot.

Owners with modified AGI above $500,000 are in a different position. The cap phases down 30 cents on the dollar above that threshold and reaches the $10,000 floor at $600,000 of modified AGI. At that point the individual SALT deduction is back to the old cap, and the PTE election continues to deliver meaningful federal savings. Most of the high-income business owners the election was built for fall into this group. It is also why 2030 matters: when the federal cap returns to $10,000 for everyone, the election regains its full value in California’s final year of the program.

One benefit of the election has nothing to do with the SALT cap and is untouched by OBBBA. The PTE tax is paid and deducted at the entity level, which reduces the ordinary income flowing through to each owner’s Schedule K-1. That lowers adjusted gross income itself, not just itemized deductions. A lower AGI can reduce exposure to the 3.8% net investment income tax, Medicare premium surcharges (IRMAA), and other AGI-based phaseouts. For an owner whose broader plan includes investment income and generational wealth transfer, that AGI reduction can matter as much as the SALT deduction itself.

The Outlook for California’s PTE Regime

SB 132 meaningfully improves California’s PTE tax regime. It adds flexibility for taxpayers, mitigates harsh prepayment penalties, and extends the federal SALT workaround window through 2030, assuming no federal repeal. California business owners should start evaluating 2026 eligibility and prepayment strategy now to ensure they remain positioned to benefit.

The value of the election is not static across those five years. From 2025 through 2029, the elevated federal SALT cap of $40,000 and up narrows the relative federal benefit for owners below the $500,000 phaseout threshold. In 2030, the federal cap drops back to $10,000 for everyone, and because California’s election is still available that year, the workaround regains its full value in its final season. Owners with discretion over when they pay state taxes can factor that timeline into a multi-year plan rather than deciding one year at a time.

One practical item is still settling into place. The FTB is rolling out updated PTE forms, including Forms 3804, 3893, and 3804-CR, to implement SB 132, and the 12.5% credit reduction is a new calculation for the 2026 forms. Owners electing for 2026 should use the current-year versions and confirm the reduction figure with their preparer.

If you’re unsure how these changes affect your business or if you need help planning for 2026, speak with a qualified California corporate tax attorney to evaluate your options and ensure compliance with both state and federal law.

Frequently Asked Questions: California’s PTE Election Under SB 132

Is the California PTE election still worth it after the higher SALT cap?

It depends on your income. For owners with modified AGI above roughly $500,000, the federal SALT cap phases back toward $10,000, and the election continues to produce real federal savings. For owners below that level, the $40,000 cap may already cover most of their state tax deduction, so the election is worth recalculating rather than renewing automatically.

Does California conform to the OBBBA’s higher SALT cap?

No. California’s tax law conforms to the Internal Revenue Code as of January 1, 2025, which predates the July 2025 Act, so none of the OBBBA changes apply on a California return. The federal cap increase does not affect the 9.3% California elective tax or the credit.

What happens if my entity misses the June 15 prepayment under SB 132?

For tax years 2026 through 2030, a missed or short June 15 prepayment no longer voids the election. Instead, each owner’s PTE credit is reduced by 12.5% of that owner’s pro rata share of the amount that was due but not paid. Paying in full by June 15 avoids the reduction entirely.

Does the PTE election still help if I take the standard deduction federally?

Yes. The election works at the entity level, not on your personal itemized deductions. The entity deducts the 9.3% PTE tax as a business expense, which lowers the income reported on each owner’s Schedule K-1, whether the owner itemizes or takes the standard deduction.

When does California’s PTE election expire?

The election is available through tax year 2030, the last year an entity can elect. It also depends on the federal SALT limitation staying in place. If Congress repeals that limitation, California’s program ends for tax years beginning after the repeal.

Does the $40,000 SALT cap phase out at higher incomes?

Yes. The cap is reduced by 30 cents for every dollar of modified AGI above $500,000 ($505,000 for 2026), down to a $10,000 floor. A taxpayer reaches that floor once modified AGI hits $600,000.

What forms are used to elect the California PTE tax?

The entity files FTB Form 3804 to compute and report the elective tax with its return, and uses Form 3893 for the required payment. Each owner then claims the credit on Form 3804-CR filed with their California personal return.

Can an S corporation make the election?

Yes. Qualifying S corporations, partnerships, and LLCs treated as partnerships can elect, provided the entity has qualified net income from California sources. Only the income of consenting owners is included in that calculation.

Does the PTE election lower my adjusted gross income?

Yes. Because the tax is paid and deducted at the entity level, it reduces the income flowing through to each owner’s Schedule K-1, which lowers adjusted gross income rather than just an itemized deduction. That can ease exposure to the net investment income tax, Medicare surcharges, and other AGI-based limits.

What happens to unused PTE credits if the program ends?

Unused credits carry forward for up to five years on the owner’s California return. That carryforward survives even if the program is later repealed, so credits already earned are not lost.

This article is for informational purposes only and does not constitute legal or tax advice. Tax laws and regulations change frequently and may affect the accuracy of this information. Consult a qualified tax attorney or CPA before making any decisions based on the content of this article.