California’s pass-through entity elective tax lets a partnership, LLC taxed as a partnership, or S corporation pay 9.3% of its consenting owners’ share of California-taxable income at the entity level, deduct it federally as a business expense, and hand each owner a nonrefundable California credit for the same amount. Senate Bill 132 extended it for taxable years beginning on or after January 1, 2026 and before January 1, 2031. The federal reason to elect survived the 2025 federal tax act: the SALT cap is $40,400 for 2026, but it phases down by 30 cents per dollar of modified adjusted gross income over $505,000 and is back to $10,000 at about $606,000, and the act left entity-level state taxes deductible. The election is made on a timely original return with Form FTB 3804; the first payment, the greater of $1,000 or half of last year’s elective tax, is due June 15 of the taxable year, and the balance by the original due date of the return, March 15 for calendar-year entities. New for 2026: an entity that misses or underpays the June 15 payment can still elect, but each owner’s credit is cut by 12.5% of that owner’s share of the shortfall. The election pays for owners above the phase-down, is roughly neutral for owners whose state taxes already fit under the cap, and can strand credit for a low-income owner who consents. For a practice owner, the year the entity sells its assets is a year to run the numbers again, because the gain is in the entity’s qualified net income.
Everything below is taken from the Franchise Tax Board’s PTE elective tax page and its help page, both updated in 2026, from IRS Notice 2020-75, and from the Tax Adviser’s March 2026 column on the SALT cap, each read October 20, 2026 and linked at the end.
- 01Who: an entity taxed as a partnership or S corporation, not publicly traded and not in a combined reporting group. Owners who can consent and take the credit: individuals, fiduciaries, estates and trusts subject to California personal income tax, and a single-member LLC owned by one of them. A corporation or partnership owner cannot. A sole proprietorship or disregarded LLC cannot elect at all.
- 02How much: 9.3% of qualified net income, the sum of each consenting owner’s pro rata or distributive share plus guaranteed payments subject to California tax. The credit equals 9.3% of the owner’s own share, is nonrefundable, carries forward five years, may reduce tax below tentative minimum tax, and cannot offset the 1% behavioral health services tax.
- 03When: election on a timely filed original or superseding return with FTB 3804, irrevocable, binding on all owners. Payment 1 by June 15 of the taxable year: $1,000 or 50% of the prior year’s elective tax, whichever is greater. Payment 2 by the original due date, without extension. Web Pay or voucher FTB 3893 only, never combined with other payments.
- 04New for 2026 to 2030: a missed or short June 15 payment no longer bars the election; the owners’ credit is reduced by 12.5% of their share of the amount unpaid (R&TC 17052.11). For 2022 to 2025 the old rule stands: no June 15 payment, no election.
- 05Federal: the entity deducts the tax under Notice 2020-75; the 2025 act kept that. The individual SALT cap for 2026 is $40,400 ($20,200 married filing separately), reduced by 30% of MAGI over $505,000, floor $10,000, through 2029, then $10,000 in 2030.
How the election works
The mechanics have not changed since SB 113 in 2022, and the FTB’s pages set them out in one place. The entity computes qualified net income from the consenting owners’ Schedule K-1 lines, as the FTB help page describes: for an S corporation, income lines 1 to 10 less deduction lines 11 and 12; for a partnership, lines 1, 2, 3 and 4c to 11 less lines 12 and 13; with items such as section 179 recapture included even where they fall outside those lines. An owner whose share nets to a loss is left out and gets no credit. Nonresident owners can consent, and their share is measured after California sourcing. The entity pays 9.3% of that total, deducts it federally in computing its non-separately stated income, and adds it back for California purposes so the state base is unchanged. Each consenting owner claims a credit for 9.3% of their own share on FTB 3804-CR, after the other state tax credit in the ordering rules, and carries any excess forward for up to five years.
Consent is per owner and the election is per year. An owner who declines is simply outside the computation: the entity still elects, that owner’s share is not in qualified net income, and that owner gets no credit. Once the return is filed with the election, it cannot be revoked on an amended return; a superseding return filed before the same deadline the original met can add or remove it. If the entity’s income later changes on audit or amendment, qualified net income is revised, the entity pays or claims the difference, and the owners amend their credits.
What the election saves on your share
Four inputs give the elective tax the entity pays on your share and the federal tax it saves you, net of the Schedule A deduction you give up because the credit reduces the state tax you pay personally. The MAGI input sets the 2026 SALT cap after the phase-down. On the California side the credit equals the tax, so the state result is a wash unless your California marginal rate on the share is below 9.3%, in which case the excess credit carries forward.
Elective tax on your share, 9.3%
Federal tax saved
Elective tax: 9.3% of the share (R&TC 19900 series as restated by SB 132). Federal saving: the elective tax deducted at the entity level, times your marginal rate, less the Schedule A deduction lost because the credit reduces the California tax you pay personally, with the 2026 cap of $40,400 reduced by 30% of MAGI over $505,000 to a $10,000 floor (joint and single; married filing separately uses half). The state-tax input defaults to 9.3% of the share plus $12,000 of property tax and can be overwritten. Ignores AMT, the 199A interaction, estimated-payment timing and the 1% behavioral health services tax. Not tax advice; model your own return. The full worksheet, the California PTE elective tax calculator, takes up to four owners with their own rates and consents, the prior-year elective tax for the June 15 payment, the balance due March 15, and the 12.5% credit reduction for a short first payment.
The 2026 SALT cap, and who the election still pays for
The election exists because of section 164(b)(6). The One Big Beautiful Bill Act of July 4, 2025 raised the individual cap from $10,000 to $40,000 for 2025, indexed it to $40,400 for 2026 with 1% increases through 2029, and returns it to $10,000 in 2030. The House version would have denied the entity-level deduction to specified service trades, which includes accounting; the enacted version did not, so the workaround confirmed in Notice 2020-75 stands for all pass-through businesses. The cap phases down by 30% of modified adjusted gross income over $500,000 for 2025 and $505,000 for 2026, stopping at $10,000.
| 2026 MAGI, joint or single | SALT cap | What the election does |
|---|---|---|
| Under $505,000 | $40,400 | Pays only to the extent state and local taxes exceed $40,400; for an owner whose California tax and property tax fit under the cap, little or nothing federally, and the June 15 cash flow and compliance are real costs |
| $505,000 to about $606,000 | $40,400 less 30 cents per dollar over $505,000 | Pays increasingly; every dollar of income in this band also costs 30 cents of cap, so the entity-level deduction is worth more here than the headline suggests |
| About $606,000 and above | $10,000 | Pays in full: the elective tax is deducted above the line at the owner’s marginal rate, and the Schedule A deduction was already at the floor |
| Any level, 2030 and after | $10,000 unless Congress acts | Back to the 2018 to 2024 analysis for the last year of the California election |
Two second-order effects to model rather than assume. The SALT deduction is disallowed for alternative minimum tax, so an owner in AMT gains from the election even under the full cap. And the entity-level deduction reduces the qualified business income on which the section 199A deduction is computed, which gives back a fraction of the benefit for owners who can take 199A, which most accounting practice owners above the threshold cannot.
Payments and dates for the 2026 and 2027 taxable years
| Item | 2026 taxable year | 2027 taxable year | Rule |
|---|---|---|---|
| Payment 1 | June 15, 2026 | June 15, 2027 | $1,000 or 50% of the elective tax paid for the prior taxable year, whichever is greater. A weekend or holiday date moves to the next business day. An entity whose short first year does not include June 15 is exempt from it |
| Payment 2 | March 15, 2027 for calendar-year partnerships and S corporations | March 15, 2028 | The remainder, by the original due date without regard to extension. Underpayment draws penalties and interest |
| Election | With the timely filed original 2026 return, on FTB 3804 | Same, 2027 return | Not on an amended return; a superseding return filed before the original or extended deadline the first return met counts as original |
| Owner credit | FTB 3804-CR with the 2026 personal return | Same | Nonrefundable, five-year carryover, applied after the other state tax credit; not on a nonresident group return |
| How to pay | Web Pay, electronic funds withdrawal through tax software, or voucher FTB 3893 by mail; designated as a PTE payment; never combined with the entity’s other payments; separate vouchers per year | FTB help page, payments and forms | |
| Estimated tax | The elective tax is not in the entity’s estimated tax computation; the credit does reduce the owner’s own estimates (see the estimated tax calculator) | R&TC 19136 as applied by the FTB | |
The June 15 payment is where practices get caught, because it is measured on the prior year. An entity that elected in a high-income year owes half of that year’s elective tax by the following June 15, whatever the current year looks like; the FTB says there is no statutory exception for an unusually high prior year. A one-time gain in 2026 sets the June 15, 2027 payment. The overpayment, if the current year comes in lower, is refunded or applied after the return is filed, but it cannot be parked as next year’s June 15 payment.
The new 12.5% credit reduction
For 2022 through 2025 a missed or short June 15 payment meant no election for the year. SB 132 changed that for 2026 through 2030 in R&TC 19914(b) and 17052.11: the election is still available, and instead each owner’s qualified credit is reduced by 12.5% of the owner’s share of the amount that was due on June 15 and not paid. The FTB’s worked example makes the arithmetic clear.
| FTB example | Figure |
|---|---|
| 2025: four equal partners consent, qualified net income $500,000, elective tax $46,500 | June 15, 2026 payment required: $23,250 |
| June 15, 2026 payment actually made | $10,000; shortfall $13,250 |
| 2026: three partners consent at $100,000 each; elective tax $27,900, balance paid with the return | Election valid under 19914(b) |
| Each consenting partner’s credit before reduction | $9,300 |
| Reduction: 12.5% of the partner’s share of the shortfall ($13,250 × 100,000 / 300,000) | $552 |
| Credit allowed | $8,748 |
Three things follow. The penalty is proportionate, not total, so an entity that discovers in October that June 15 was missed should still elect if the federal saving exceeds the reduction, which it usually does. The reduction is computed on the 2026 Form 3804, so the entity, not each owner, works it out. And errors in the June 15 amount can be corrected only on or before June 15; after that date the shortfall is fixed. The entity-level deduction federally is unaffected by the reduction.
Who should consent, and who should not
- Consent: owners above the phase-down. At MAGI of about $606,000 and up the cap is $10,000 and every dollar of elective tax is a federal deduction at the owner’s marginal rate. For an owner at 35% with $400,000 of share, the saving is about $13,000 a year.
- Consent, after modeling: owners in the band. Between $505,000 and $606,000 the cap is shrinking and the election recovers part of what the phase-down takes. Run the return both ways.
- Usually decline: owners whose state and local taxes fit under $40,400. The election moves a deduction from Schedule A to the entity and changes little; the cost is a June 15 cash outlay and a second set of forms. An owner subject to AMT is the exception.
- Decline: owners whose California rate on the share is below 9.3%. The credit exceeds the tax, the excess is nonrefundable and carries five years, and the entity has paid cash on their behalf that the owner may never recover. A junior partner with a small share and little other income is the common case.
- Check the ownership chain. An owner that is a corporation or a partnership cannot be a qualified taxpayer; its share is left out even if the entity elects. A trust or a grantor trust can consent and pass the credit through.
- Nonresident owners. They can consent on their California-sourced share and claim the credit against California tax; whether their home state credits the California tax paid at the entity level is a question for that state.
The sale-year question for a practice owner
The FTB’s help page answers two questions that matter to anyone planning to sell a practice held in an S corporation or partnership. Gain from the entity’s sale of an entity-level asset is in qualified net income, because it is in the owners’ pro rata or distributive share. Gain from an owner’s sale of the interest itself, the stock or the membership interest, is owner-level income and is not. Nearly every California practice sale is an asset sale, and the largest asset is goodwill, which California taxes as ordinary income at rates up to 12.3% plus the 1% behavioral health services tax above $1 million. If the entity elects in the year of sale, 9.3% of that gain is paid at the entity level and deducted federally, and the owner takes the credit against the California tax on the same gain. For a seller above the SALT phase-down that converts a state tax bill that would otherwise be nondeductible into an above-the-line federal deduction in the year the bill is largest. The arithmetic for the bill itself is in how the sale of an accounting practice is taxed.
Four cautions. The election is only available to an entity taxed as a partnership or S corporation; a sole proprietor or a single-member LLC selling the practice has no election to make. The June 15 payment for the year after the sale will be half of the sale year’s elective tax, which can be large, and if the entity still exists and elects again it owes that payment regardless of income, so the dissolution timing and the final return matter. The elective tax is 9.3% while the owner’s California rate on a large gain is higher, so the credit covers part of the state bill and the rest is paid personally. And the credit cannot reduce the 1% behavioral health services tax. The entity-level payment is due by the original due date of the final return, so a practice sold in September has a June 15 payment already behind it and a balance due the following March.
Sources
- Franchise Tax Board, Pass-through entity (PTE) elective tax (updated April 23, 2026): taxable years through 2030, qualified entities and taxpayers, the election, the June 15 and return-date payments, the 2026 to 2030 credit reduction, the 9.3% rate, the credit and its carryover, forms 3804, 3804-CR and 3893. Read October 20, 2026.
- FTB, Help with pass-through entity elective tax (updated August 4, 2026): SB 132 and R&TC 19914(b) and 17052.11, the credit-reduction example, Schedule K-1 lines for qualified net income, entity-level asset sales versus sales of an interest, superseding returns, tentative minimum tax, the behavioral health services tax, estimated taxes, nonresident withholding, payment methods.
- IRS Notice 2020-75: entity-level state and local income taxes paid by a partnership or S corporation are deductible in computing non-separately stated income.
- The Tax Adviser, Cap raised, strings attached: the 2025 SALT shake-up (Wendy W. Lacey, CPA, March 2026): H.R. 1 (P.L. 119-21), the $40,000 and $40,400 caps, the 30% phase-down over $500,000 and $505,000, the $10,000 floor, the 2030 reversion, the House proposal to deny the PTET deduction to specified service trades and its removal, AMT.
- How the sale of an accounting practice is taxed in 2026: California ordinary-income treatment of goodwill and the 2025 rate schedule used above.
This article is general information for California practice owners and is not tax advice. The rules are as published by the Franchise Tax Board and the IRS on the dates shown; the election, the consent of each owner and the June 15 payment should be modeled on the actual returns before any payment is made.
Denis is a practicing tax and accounting professional and the principal of VistaTax, a practice serving individuals and closely held businesses: individual and business tax preparation, tax planning, bookkeeping, financial reporting and payroll. As WIN’s founding CPA he anchors the licensed side of the structure and sits at the table for every transition. More about WIN’s team.