For the past few years, the California pass-through entity tax (the PTET) has been the rare tax maneuver with an official blessing: your S-corp or partnership pays state tax at the entity level, deducts it federally without touching the SALT cap, and hands you back a California credit for your share. Then 2025 threw two curveballs at once. The election was scheduled to expire, and Congress rewrote the SALT cap it was built to work around. Both stories ended well, mostly. But "worth it for everyone" was never true, and it's less true now.
How the election works, in one paragraph
A partnership or S-corp (including an LLC taxed as either) elects each year to pay California 9.3% of the consenting owners' shares of the business's income. The entity deducts that payment on its own federal return; the IRS blessed entity-level state taxes as deductible back in 2020, outside the personal SALT cap. Each consenting owner then claims a California credit for the 9.3% paid on their share. The credit isn't refundable, but whatever you can't use carries forward for up to five years. And consent is individual. Your co-owner's choice doesn't bind yours.
The sunset that didn't happen
The original 2021 law ran through 2025, and there was a real chance Sacramento would let it lapse. Instead, Senate Bill 132, signed in June 2025, extended the election through 2030 and softened its harshest rule. Through 2025, missing the June 15 prepayment disqualified the entity for the whole year. It's a deadline that has ruined more than a few summers. Starting with tax year 2026, a missed or short prepayment trims the credit by 12.5% of the shortfall instead. Painful, not fatal.
The prepayment itself hasn't gone anywhere: every June 15, an electing entity owes the greater of $1,000 or half of last year's PTET. The election is annual and irrevocable once made. Decide deliberately, before money moves, while the choice is still cheap.
What Congress changed on the federal side
The One Big Beautiful Bill Act raised the personal SALT cap from $10,000 to $40,000 starting in 2025, with the cap creeping up about 1% a year through 2029 and snapping back to $10,000 in 2030. The catch is a phase-down: once modified AGI passes roughly $500,000 (indexed), the cap shrinks by 30 cents for every extra dollar of income until it lands back at $10,000, which happens around $600,000. Early drafts of the bill also took aim at entity-level workarounds like the PTET. The final law left them alone.
So who still benefits?
Put the extension and the new cap together, and the answer depends mostly on your federal income.
- Well above $600,000 of income: your SALT cap is effectively $10,000 again, and the election keeps doing what it's always done. For most owners here, it's still the biggest state-tax lever available.
- Under $500,000: the $40,000 cap may already cover your state income and property taxes without any election. This is the group that should stop electing on autopilot and check.
- In the phase-down band: run it both ways. Modest swings in income move the answer year to year.
- Low-bracket or nonresident owners: the credit is nonrefundable, and 9.3% may exceed the California tax you actually owe, leaving you waiting on the five-year carryover. Consent with eyes open.
- A quieter drag: the entity-level deduction also trims the income your 20% QBI deduction is computed on, so the net federal benefit usually runs somewhat smaller than the sticker rate.
The PTET earned its popularity when the cap was $10,000 with no expiration date in sight. It's now a genuine planning question, with a runway through 2030 and a phase-down that turns "obviously yes" into "depends on the year." If your entity has elected every year since 2021, make this the year it proves it still deserves to.
This article is general information, not tax, legal, or accounting advice, and reading it does not create a CPA-client relationship. Tax rules change and depend on your specific facts. Please consult a qualified professional about your situation before acting.