If you own a profitable pass-through business in California, there’s a tax move that can genuinely save you money if you plan it correctly. You’ll usually hear it called the “PTE tax” (or PTET).

For certain California business owners, PTE tax is one of the few remaining ways to legally reduce federal taxes without doing anything aggressive or questionable.

How Federal SALT Limits Increase Your Tax Bill

When you pay California taxes personally, the IRS doesn’t let you deduct all of that on your federal return. There’s a cap on how much state and local tax you can write off — what everyone refers to as the SALT cap.

As of early 2026, that cap is $40,000 for itemizers ($20,000 if you’re married filing separately), and for higher earners it can be reduced further by income-based limits, though not below $10,000.

If your California income tax and property tax are higher than that amount, the excess just isn’t deductible. You’ve already paid it, but you don’t get full federal credit for it.

And once a tax payment stops being deductible, you’re effectively paying federal tax on money that already went to California. That’s the part that really hurts.

Many in the tech sector, such as LLCs, partnerships, and S corporations file for PTE tax elections to mitigate the federal limitation on state and local tax (SALT) deductions.

What the California PTE tax is

California allows certain pass-through entities to elect to pay part of the state tax at the business level instead of having all of it flow through to the owners personally.

When the business does that, California gives each owner a credit on their personal California return for their share of the tax the entity already paid. That’s how the state avoids taxing the same income twice.

The reason people care about this election has nothing to do with California and everything to do with the federal side. A state tax paid at the entity level can reduce the amount of pass-through income that shows up on the owners’ federal returns.

You’re still sending the same money to California — the difference is how it’s treated federally, and that difference can matter.

Who qualifies for PTE Tax (and who doesn’t)

California doesn’t let every business use the PTE tax. There are eligibility rules, and they matter. According to the Franchise Tax Board (FTB), the entity itself has to be taxed as a partnership or an S corporation to even be in the conversation.

In practice, this usually means entities like:

• A multi-member LLC taxed as a partnership

• An LLC that’s elected S-corp status

• A straight S corporation

On the flip side, some entities are generally excluded, including:

• Publicly traded partnerships

• Entities that are required or allowed to be part of a combined reporting group

Ownership matters just as much as entity type. The credit is primarily designed for individual owners (and certain trusts or estates) who are subject to California personal income tax.

If your ownership includes corporations, partnerships, or other entities, things get more complicated quickly. It can still work in some cases, but it’s not something you want to assume or eyeball — this is where a real analysis matters.

How the PTE tax is calculated (the 9.3% thing)

The elective tax rate is 9.3% of the entity’s “qualified net income” (FTB’s wording).

Qualified net income is basically the sum of the qualified owners’ shares of income (and certain guaranteed payments) that are subject to California personal income tax.

Two quick truths:

• 1) In a simple single-owner, California-resident setup, it often looks close to 9.3% of profit.
• 2) In multi-owner or multi-state setups, qualified net income can be smaller than total profit. That changes the elective tax amount and the credit mechanics.

This is why the best question isn’t “Should I do PTE tax?”

The best question is “How much qualified net income do I have, and what’s the net federal benefit after timing and limitations?”
 

What PTE tax election may look like for you

Let’s put some simple numbers around it.

Say your business has $500,000 of qualified net income. At the 9.3% elective tax rate, that works out to roughly $46,500 paid by the business to California. On your personal California return, you don’t lose that money — you claim a credit for your share of the tax the business already paid.

The potential benefit shows up on the federal side. Because that state tax was paid at the entity level, it can reduce the amount of income that flows through to you federally.

In the right tax bracket, that reduction can translate into meaningful federal savings — sometimes in the $10,000 to $20,000 range. In other cases, it might be smaller, and in the wrong setup it can be negligible.

That’s why this is always a numbers exercise. The math matters far more than the anecdotes.

PTE tax election and the timing trap

The most important thing to understand about the PTE election is that it’s a cash-planning decision, not something you figure out at filing time.

For calendar-year entities, the Franchise Tax Board laid out a two-payment structure for 2022 through 2025. The first payment is due on or before June 15 of the election year and is generally the greater of $1,000 or 50% of the prior year’s elective tax. The second payment is due by the original due date of the return, without extensions.

This timing is where a lot of people miss the benefit. They’re focused on filing in March or April, finally decide they want to elect PTE, and then realize the June window has already passed.

If you want the savings, the June payment has to be treated like a scheduled bill — something you plan for and fund ahead of time. That’s really the whole game with PTE.

What changes starting 2026 (with PTE tax in the mix)

Starting in 2026, California eased up a bit on the June 15 rule, but it didn’t get rid of it.

According to the FTB’s SB 132 bill analysis, the PTE election can still be made even if the required June 15 payment is missed or comes in short, as long as the taxable year begins on or after January 1, 2026 and before January 1, 2031.

That said, this isn’t a free pass. If the June 15 payment is missed or underpaid, the owners’ credit is reduced by 12.5% of the amount that should have been paid by that date, allocated based on each owner’s share.

In plain terms, June 15 still matters — it’s just no longer an automatic disqualification. The practical takeaway is not to treat this “relief” as permission to be casual about timing. It’s best thought of as a backstop for mistakes, not a planning strategy.

Is PTE tax still worth it now that the SALT cap is higher?

A common question now is whether the PTE election is still worth it given that the SALT cap is higher than it used to be.

The honest answer is that it depends, and anyone offering a universal yes or no is oversimplifying.

PTE became popular when the federal SALT cap was painfully low for people in high-tax states like California. As of early 2026, the IRS says the cap for itemizers is $40,000, though higher-income taxpayers can still see that amount reduced by income-based limits.

That does ease the pressure for some owners. But plenty of California business owners still pay well over $40,000 a year in state and local taxes, which means they’re still bumping up against the cap and still have nondeductible tax sitting there.

It’s also worth remembering that many owners don’t itemize at all. If you’re taking the standard deduction, the SALT cap itself matters less, and the analysis shifts to whether paying tax at the entity level meaningfully reduces the pass-through income that shows up on your federal return.

The bottom line is that PTE is no longer a default “yes” just because it exists. At this point, it’s very much a run-the-numbers decision.

Industry reality checks (especially for construction, SaaS/tech, real estate, B2B)

One thing that gets lost in generic PTE discussions is that industry context matters. The same rules apply, but the friction points are very different depending on how your business actually operates.

Construction:

• Retainage and slow-paying GCs can make you profitable on paper but tight on cash.
• If June is a cash pinch, fund the PTE payment monthly from January to May. Treat it like payroll.
• Multi-state jobs can complicate what income is actually California-taxable (which impacts qualified net income).

SaaS / tech:

• Profit swings are common. PTE works best when profits are steady and predictable.
• Multiple founders in different states means you can’t assume everyone is a “qualified taxpayer” the same way.
• If you’re in a scale year (heavy spend, low profit), don’t force this just to “do something.”

Real estate:

• PTE often fits well for profitable management companies and simpler K-1 structures.
• It gets messy fast with syndications: out-of-state investors, entity partners, special allocations, and waterfalls.
• If your ownership is complicated, your analysis needs to be complicated too. That’s just reality.

B2B services:

• Usually the cleanest use case: predictable margin, cleaner books, fewer allocation surprises.
• The only real enemy is procrastination on the June payment.

How to pay PTE tax and keep it clean

The FTB says PTE payments should be made through their Web Pay system or with the PTE payment voucher, and the PTE payment can’t be combined with the entity’s other tax payments.

That detail sounds minor, but it makes a big difference when it comes to clean execution.

Practical tips that save headaches:

• Create a separate ledger account for “CA PTE elective tax.”
• Reconcile the payment to the FTB confirmation right away (don’t wait until filing).
• If you have multiple owners, keep a simple schedule that ties: owner %, qualified net income, and expected credit.
• Tell owners early: “This is a cash-timing move. You may see lower federal taxable income, but the California credit is how we avoid double-paying.”

Clean records are what keep this from turning into a credit mismatch fight in April.
 

PTE tax and Cash planning: Make June boring

The simplest way to make the PTE tax election work is to take the stress out of June altogether.

In practice, that means getting ahead of it early. In January, put together a rough profit forecast and a preliminary PTE estimate. From there, set up automatic monthly transfers into a tax reserve account from January through May, and treat those transfers the same way you treat payroll or rent — they’re not optional.

If your cash flow is unpredictable, whether because of construction retainage, revenue swings in tech, or deal timing in real estate, you can still make this work. It just requires a tighter forecast and a little more cushion.

What doesn’t work is the “we’ll figure it out later” approach. PTE is a planning play, and it tends to reward people who actually plan.

The common PTE tax election mistakes (aka how people blow this)

Most PTE problems aren’t about the rules themselves — they come from how people execute.

The most common ways this goes sideways are pretty consistent:

• Waiting until tax filing time to decide
• Missing (or guessing at) the June 15 prepayment
• Assuming it’s always 9.3% of total profit instead of qualified net income
• Ignoring owner mix (out-of-state owners, entity owners, trusts, etc.)
• Sloppy execution: payment applied wrong, credits don’t tie out, owners confused
• Forgetting this is a cash timing move: you’re paying earlier. Period.

None of these are exotic mistakes. They’re all preventable with planning and clean follow-through.
 

Quick “should I look at this?” checklist

As a rough filter, the PTE election tends to make sense in a pretty specific set of situations.

Look at it if:

• You’re consistently profitable
• Your California tax bill is meaningful
• Your total state + property taxes are near or above the federal SALT cap
• Five-figure tax savings would matter
• You can plan for the June 15 cash

Probably skip (or be cautious) if:

• Profit is low or volatile
• Cash is tight
• Ownership is complicated
• You won’t follow through cleanly

What to ask your CPA (so you get an answer with numbers)

If you want a useful answer from your CPA, the way you ask the question matters. A vague “Should I do PTE?” almost always gets you a vague response. There just isn’t enough there to analyze.

Instead, ask for specifics:

• “Can you run a PTE election projection for next year?”
• “What’s the estimated federal benefit after considering my SALT situation?”
• “What’s the June 15 payment amount and funding plan?”
• “Any eligibility or ownership problems?”

If those questions can’t be answered with actual numbers, you’re not really doing analysis — you’re just going on vibes.
 

A simple execution plan (the clean way)

If you want to execute this cleanly, the process itself is pretty straightforward — it just has to happen in the right order.

1. Early in the year (Q1), start by estimating profit and confirming which owners actually qualify for the PTE election.
2. By May, you should have enough information to decide whether you’re electing for the year.
3. From January through May, fund a PTE reserve monthly so the June 15 payment doesn’t turn into a scramble.
4. When June comes around, make the first payment separately using Web Pay or the PTE voucher, and keep the confirmation so it can be reconciled.
5. During filing season, make the election on the original, timely filed California return. Once it’s made, it’s irrevocable for that year.
6. Finally, make sure each owner’s return properly claims the credit and that those credits tie back to the K-1 reporting. That last step is what keeps everything aligned and avoids cleanup later.

FAQs

Is PTE tax election only for S corps?

No. California says qualifying entities are taxed as partnerships or S corporations.

What happens if we miss June 15?

For 2022-2025, missing or underpaying the June payment could disqualify the election. Starting in 2026 (per the FTB’s SB 132 analysis), you may still elect, but the owners’ credit is reduced by 12.5% of the unpaid amount that should have been paid by June 15.

Is the rate always 9.3%?

The elective tax rate is 9.3% of qualified net income. The heavy lift is defining qualified net income for your owners and California-taxable income.

Can I do this “later” when we file?

You make the election when filing, but the clean benefit usually assumes you handled the June prepayment. This is planning, not last-minute filing magic.

Do out-of-state owners mess this up?

They can. Mixed residency and entity owners are exactly where you need a detailed model and clear documentation.

How do I know if it’s worth it?

Build a one-page model: expected qualified net income, elective tax, expected federal rate, your SALT situation, and the cash timing. Then decide.

Bottom line

The PTE tax is still one of the cleanest legal options available for some California pass-through owners. It tends to reward people who plan early, fund the June payment, and execute cleanly.

If you want the savings, put June 15 on the calendar and fund it like a bill — not like a surprise.