Good news in tax: California has officially extended its elective pass-through entity tax (PTET) regime for taxable years beginning on or after January 1, 2026, and before January 1, 2031. While the extension largely preserves the framework taxpayers have operated under since 2021, it includes one important procedural change: failing to make the June 15 prepayment no longer invalidates the election.

Instead, California reduces the owners’ PTET credit when the required June payment is missed or underpaid. The change removes what many taxpayers viewed as one of the harshest compliance traps in the original regime.

Remember that the PTET rules provide a workaround to the federal limitation on deducting state and local taxes. Under these rules, an eligible partnership or S corporation may elect to pay California tax at the entity level, and the owners then receive a corresponding California tax credit.

How the extended PTET rules work

For taxable years beginning in 2026 through 2030, qualifying California pass-through entities may continue electing to pay tax at the entity level. The election remains available to entities taxed as partnerships and S corporations. In contrast, publicly traded partnerships and entities that are permitted or required to be included in a combined reporting group remain excluded.

As under the prior rules, the election must be made annually on a timely filed original return and cannot be made on an amended return. Once made, the election is irrevocable for that taxable year.

The elective tax rate also remains unchanged at 9.3% of qualified net income. Generally, qualified net income consists of the distributive shares, pro rata shares, and guaranteed payments of the qualified taxpayers, all subject to California personal income tax.

Missing the June 15 prepayment no longer forfeits the election      

The most consequential change for 2026–2030 concerns the June 15 prepayment requirement. California (under its Revenue and Taxation Code Section 19914) still       requires a two-step payment structure:

By June 15 of the taxable year, the electing entity must pay the greater of:

● 50% of the elective tax paid for the prior taxable year, or

● $1,000

The remaining balance must be paid by the due date of the original return, determined without regard to extensions.

How has it changed? Under the prior PTET rules, failure to make the June 15 payment on time generally resulted in a complete loss of the PTET election for the year. In practice, this created a harsh ‘all-or-nothing’ compliance trap for taxpayers who intended to elect into the regime.

Beginning with taxable years starting in 2026, California has substantially softened that rule. Even if the entity misses or underpays the June 15 payment, it may still make a valid PTET election for the year.

This significantly reduces the risk of losing the election due to a missed payment deadline.    

A reduced credit replaces a lost election    

Although the election is preserved, even if the June payment is missed or is deficient, California now imposes a statutory reduction to the owners’ PTET credit.

The PTET credit generally equals 9.3% of the taxpayer’s distributive share, pro rata share, and guaranteed payments included in qualified net income.

For taxable years beginning on or after January 1, 2026, however, California reduces the qualified amount by 12.5% of the qualified taxpayer’s pro rata share of the missing amount that should have been paid by June 15.    

An example:

Assume an S corporation made a PTET election for 2025 and paid $40,000 of elective tax for that year, and 2026 is the same as 2025. Individual Taxpayers A and B each own 50% of the S corporation.

For 2026, the required June 15 prepayment would be the greater of:

● 50% of prior year PTET = $20,000, or

● $1,000

So the required June 15 payment is $20,000.

If the entity only paid $8,000 by June 15, it is $12,000 short of the required prepayment.

Under the new rules:

● the entity can still make a valid PTET election, but

● the owners’ PTET credit is reduced.

If Taxpayer A is entitled to 50% of the PTET credit = $20,000:

● Underpaid amount = $12,000

● Reduction = 12.5% × $12,000 = $1,500

● Owner’s share of reduction = 50% x $1,500 = $750

So, instead of losing the election completely, that owner’s PTET credit is reduced by $750 from $20,000 to $19,250.

In short, California replaced the old ‘invalid election’ penalty with a partial credit reduction.

Unused credits can still carry forward    

The PTET credit remains nonrefundable. However, unused credits may be carried forward for up to five years.

This gives owners flexibility when their California tax liability varies from year to year.

Administrative requirements remain largely unchanged    

The California Franchise Tax Board (FTB) has indicated that the election process remains largely unchanged for 2026 through 2030.

Among the key administrative requirements:

● The election must be made on a timely-filed original return, together with FTB Form 3804.

● Elective tax payments must be made separately using Web Pay or FTB Form 3893 and cannot be combined with other entity-level tax payments.

● Qualified taxpayers claim the corresponding credit on FTB Form 3804-CR.

California continues to require an addback adjustment where the PTET deduction is deducted for federal income tax purposes in computing California net income.

In addition, California’s other state tax credit rules continue to require taxpayers to increase ‘net tax payable’ by the amount of PTET credit used before applying the other state tax credit calculation.

FTB can still correct certain PTET errors      

California can still fix certain PTET mistakes on a return without going through a longer review process. In other words, if the credit was claimed incorrectly, the FTB may adjust it directly.

    This can apply, for example, if:

● Required payments were not timely made

● Payments exceed the computed elective tax

● No valid election exists

● The claimed credit exceeds the reduced amount permitted under the underpayment rules

This means the FTB may correct these issues and reduce or disallow the credit without first starting a full deficiency proceeding.

Special rule for fiscal-year entities          

California also included a coordination provision for fiscal-year entities. Where a qualified taxpayer owns an electing entity with a taxable year beginning on or after January 1, 2030, and before January 1, 2031, and the entity operates on a fiscal year basis, the owner may claim the corresponding PTET credit in the owner’s taxable year beginning on or after January 1, 2031, and before January 1, 2032.

PTET remains tied to the federal SALT cap          

California extended the PTET rules through 2030, but the extension was contingent on the federal SALT deduction limit remaining in place. Currently, California is treating that requirement as met, so the updated PTET rules are currently in effect.

Final thoughts    

California’s extension of the PTET rules through 2030 keeps most of the framework business owners and advisors have been working with since 2021, including the 9.3% entity-level tax, the annual election made on a timely original return, and the related owner-level credit.

The biggest change is that missing or underpaying the June 15 prepayment no longer results in the PTET election being lost entirely. Starting in 2026, the election can still remain valid, but the owners’ credit may be reduced based on the unpaid portion of the required June payment.

Overall, this change gives taxpayers more flexibility while still encouraging timely payments.
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If you have questions about how these PTET changes may affect your business, contact your tax advisor or reach out to info@ascendadvisors.com for guidance on understanding and planning for these updates.

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