A 2021 California workaround lets business owners deduct state taxes that the federal cap would otherwise limit. Here is who qualifies, when payments are due, and what to ask before year-end.
Since 2018, the federal deduction for state and local taxes has been capped, and for California business owners with significant income, that cap costs real money. The Pass-Through Entity Tax, or PTET, is the workaround California created in 2021, and it remains available through 2030. The catch is timing: the election has to be made on a timely filed original return, and it can’t be added later with an amended one.
First: Where the $10,000 cap came from
Before 2018, individuals could generally deduct state and local taxes, known as SALT, on their federal returns, with the Alternative Minimum Tax as the main limit. In 2018, federal law capped the deduction at $10,000, which hit hardest in states with high property values and state taxes. You can see how it works on Schedule A of Form 1040. Starting in 2025, the cap rose to $40,000, but it phases back down once modified adjusted gross income passes roughly $500,000 and bottoms out at $10,000. The higher cap is also temporary and is scheduled to return to $10,000 in 2030. For owners with significant pass-through income, the cap still looks a lot like the old one.
Second: What California did about it
States started looking for ways around the cap almost immediately. California created PTET in 2021, and 35 other states now have their own versions. Qualifying businesses can elect to pay California income tax at the entity level, which gives owners a federal deduction they would otherwise lose to the cap. The tax is 9.3% of the entity’s qualified net income, and owners claim a nonrefundable credit on their California returns for their share, with unused credits carrying forward up to five years. The Franchise Tax Board’s PTE elective tax page lists the current forms, including the instructions for the payment voucher (FTB 3893). California has extended the program through 2030.
Third: Who can use it
The election belongs to businesses taxed as partnerships or S-corporations, and it benefits the individuals and trusts that own an interest in them.
Partnerships: the entity makes the election, and its owners claim the credit on their California returns.
LLCs: eligible when taxed as a partnership or S-corporation.
S-corporations: the same election, with shareholders claiming the credit.
Who it doesn’t apply to: C-corporations and sole proprietors aren’t taxed as partnerships or S-corporations, so the election isn’t available to them. Publicly traded partnerships are excluded too, and owners that are corporations or partnerships can’t claim the credit.
Fourth: What it looks like in dollars
David Bailey, CPA WMB2, LLP, works with a client who has about $10 million in income from partnerships and S-corporations. By using PTET, that client saves $407,000 in federal taxes every year. Results vary by situation, which is why the first step is a conversation with your CPA.
Fifth: When the deadlines hit
The election: made each year on a timely filed original return. Once it’s made, it’s irrevocable for that year.
First payment, June 15: the greater of $1,000 or 50% of the PTET paid for the prior year.
Second payment: the remaining balance, due by the original return due date, without extensions.
If you miss June 15: before 2026, a missed or short payment meant no election that year. For 2026 through 2030, you can still elect, but owners’ credits are reduced by 12.5% of their share of the unpaid amount.
Sixth: What to ask your CPA before year-end
Does my entity qualify? The business has to be taxed as a partnership or S-corporation, and the owners claiming the credit need to be individuals, trusts, or estates.
Does it help at my income level? Above roughly $500,000 of income, the higher federal cap phases back down, which is where PTET comes into play.
What is my payment plan? That covers the June 15 payment, the balance due with your return, and what the 2026 rule change means if you skipped a payment.
Do the books support the numbers? Your CPA can only work with what the records show, which is where good monthly bookkeeping comes in.
Common Questions About Bookkeeping for Seniors
What is the California pass-through entity tax (PTET)?
An elective tax that lets qualifying partnerships, LLCs, and S-corporations pay California income tax at the entity level, giving owners a federal deduction they would otherwise lose to the cap on state and local taxes.
Who can use PTET in California?
The business has to be taxed as a partnership or S-corporation, and the owners claiming the credit have to be individuals, trusts, or estates subject to California income tax. C-corporations, sole proprietors, and publicly traded partnerships can’t use it.
When are PTET payments due in California?
The first payment is due June 15 of the election year, and the remaining balance is due by the original return due date. For 2026 through 2030, a missed or short June payment no longer blocks the election, but it reduces owners’ credits.
If you own part of a partnership, LLC, or S-corporation and haven’t asked your CPA about PTET, year-end is a good time to do it. We work with business owners across Marin County and the greater Bay Area, and clean books make that conversation faster. Let’s talk.