Personal Finance & Estate › Income, gift, estate & real-estate taxes › California income tax (top rate 13.3%)
California pass-through entity (PTE) elective tax
Extended through 2030· Tax rule
Depends on youExperts differ; the right answer depends on your situation.
An optional California tax a partnership, LLC or S corporation pays on owners' income so the owners sidestep the federal SALT cap.
See it on the Personal Finance & Estate map →How it works
The entity elects each year to pay 9.3% of consenting owners' share of qualified net income to California. It deducts that payment on its federal return, where the SALT cap does not apply, and each owner takes a matching credit against personal California tax. Payment comes in two parts, the first due June 15; missing it can shrink or void the benefit. Created by AB 150 in 2021, it was extended in 2025 through 2030.
Why it matters for you
For high-income California owners it can turn thousands of dollars of non-deductible state tax into a federal deduction, though the raised SALT cap changed the math.
Rules, limits and sources (2026)
California Revenue and Taxation Code sec. 19900 and following; FTB Forms 3804 and 3893. IRS Notice 2020-75 confirmed such entity-level taxes are deductible by the entity.
Watch out for
Whether it still pays depends on income, the $40,400 cap and its phase-down, QBI effects and California's alternative minimum tax; CPAs rerun the numbers yearly.
Connections (2)
▸California pass-through entity (PTE) elective tax is a SALT workaround in California income tax (top rate 13.3%)Standard practice
How they connect
Inside California's income tax, the PTE tax shifts who pays: the entity prepays 9.3% on owners' share of income, and owners get a dollar-for-dollar credit on their personal California return. The state collects about the same; owners gain a federal deduction the SALT cap would otherwise block.
When it applies
Enacted by AB 150 in July 2021 for 2021–2025; a 2025 budget law extended it through 2030. The Franchise Tax Board administers it.
How sure?
California Revenue and Taxation Code sec. 19900–19906; FTB Form 3893 for payments and Form 3804 for the election.
Watch out for
Unused credits carry forward five years; interaction with California's alternative minimum tax and other credits can limit the value.
▸California pass-through entity (PTE) elective tax works around SALT deduction cap (raised to $40,000 in 2025)Depends on you
How they connect
The SALT cap limits individuals, not businesses. The PTE tax moves state income tax on business income from the owner's return, where it is capped, to the entity's return, where it is an ordinary business deduction. The raised cap made it less vital for some owners, but not for high earners.
When it applies
Connecticut created the first entity-level tax in 2018; the IRS approved the approach in Notice 2020-75; more than 30 states now offer one.
How sure?
IRS Notice 2020-75; the final 2025 law dropped House proposals that would have limited these workarounds.
Watch out for
Whether Congress or the IRS will curb these workarounds in the future remains open.