California Pass-Through Entity Tax Election: SALT Workaround for Equity Comp Owners
If you own equity in an S-corp or a partnership and California takes a real bite out of your income, the pass-through entity elective tax is likely the single largest planning lever available to you before your return gets filed. It lets the entity, not you personally, pay California tax and deduct that payment as a federal business expense. You then get a dollar-for-dollar California credit for the same amount. The mechanism is not exotic. It is a timing and character shift, and for owners who clear the federal $10,000 state and local tax cap every year, it is close to free money.
This page covers who qualifies, how the 9.3% election actually works, why the equity-comp population (consultants holding stock, single-owner S-corps, partners in professional service firms) needs to look at this differently than a typical operating business, and the deadlines that make or break the election in a given year.
Why This Exists: The TCJA SALT Cap
The 2017 Tax Cuts and Jobs Act added IRC Section 164(b)(6), capping the itemized deduction for state and local taxes at $10,000 per return, regardless of filing status. Before TCJA, a California taxpayer paying $60,000 in state income tax could deduct the full amount on Schedule A. After TCJA, only the first $10,000 counts. For a high earner in California, where the top marginal state rate reaches 13.3%, that cap eliminates the deduction for the overwhelming majority of state tax paid.
The cap applies to individuals. It does not apply to a business entity paying its own tax obligations as an ordinary and necessary business expense. That distinction is the entire basis for the pass-through entity workaround that more than 30 states, including California, have since enacted.
California's AB 150 Election
California enacted the Small Business Relief Act (AB 150) in 2021, adding California Revenue and Taxation Code Section 19900 et seq. It created an elective tax that a qualifying pass-through entity can pay directly to the Franchise Tax Board at a flat 9.3% rate on qualified net income, in place of that income passing through untaxed at the entity level to be taxed on each owner's personal return. SB 113, signed in 2022, cleaned up several eligibility problems in the original bill, including allowing single-member LLCs taxed as disregarded entities to participate as owners of an electing entity and removing the prior restriction that disqualified entities with certain trust or nonresident owner structures.
As originally enacted, the election was available for tax years 2021 through 2025. Whether the election has been extended for tax year 2026 and beyond is UNVERIFIED as of this writing. California's other major PTE-style provisions have periodically been extended or modified through subsequent budget trailer bills, and a lapse or renewal of AB 150 for 2026 should be confirmed against current FTB guidance before assuming eligibility for a given tax year. Do not rely on this page alone to confirm 2026 availability. Silicon Valley Tax verifies current-year eligibility as the first step of every PTE engagement.
How the Election Works
The mechanics run in three steps. First, the qualifying entity, an S-corporation, a partnership, or a multi-member LLC taxed as a partnership, makes an annual election to pay California tax at the entity level on its qualified net income, which generally means income attributable to owners who consent to the election. Second, the entity pays that tax, 9.3% of qualified net income, directly to the FTB. Because the entity is paying its own tax liability as a business expense, that payment is deductible on the entity's federal return, reducing the federal taxable income that flows through to each owner on their K-1. Third, each consenting owner claims a nonrefundable California tax credit equal to their share of the tax the entity paid, which offsets their personal California income tax liability dollar for dollar.
The net effect: income that would have been taxed at the owner's personal level, with the state tax portion capped at $10,000 federally, is instead taxed at the entity level, where the full amount is federally deductible with no cap. The owner's federal taxable income drops by their share of the entity-level tax paid, and their California liability is unaffected because the credit offsets what they otherwise would have owed. For an owner in the top federal bracket, the annual federal tax savings run roughly 37% of the entity-level tax paid, since that is the marginal rate that would otherwise apply to the income shifted off the owner's personal return.
Who Qualifies
Qualifying entities are S-corporations, partnerships, and LLCs taxed as partnerships that have at least one owner who is a corporation, individual, fiduciary, estate, or trust subject to California personal income tax, and that consent to the election in writing each year. Owners of the electing entity can include individuals, trusts, and (after SB 113) other pass-through entities including single-member LLCs.
Single-member LLCs taxed as disregarded entities do not themselves qualify to make the election. A disregarded entity has no separate tax existence from its sole owner, so there is no entity-level return on which to make the election. If you operate as a single-member LLC, the workaround is not available to you directly. Restructuring into a multi-member entity, or operating through an S-corp election on the same LLC, are the paths worth evaluating, and both carry their own tradeoffs that should be modeled before making a change purely to access this credit.
Partners in law firms, consulting firms, and other multi-owner professional service partnerships are squarely in scope. So are S-corp shareholders operating consulting practices, medical or dental groups organized as S-corps, and real estate or investment partnerships with California-resident partners.
The Equity Comp Angle
The equity comp population intersects with the PTE election in a few specific ways worth naming directly. Consultants and independent contractors who receive equity from client companies, in addition to cash fees, and who operate through their own S-corp or partnership, can run the PTE election on the entity's ordinary business income even while the equity itself is taxed separately under its own rules (ISO, NSO, RSU, or QSBS, depending on the grant). The election does not touch the equity income directly. It touches the pass-through business income the entity generates.
Single-owner S-corps holding an equity stake, common among independent consultants and fractional executives who take board seats or advisory equity through their own corporate entity, are a clean fit for the election, since an S-corp is always a qualifying entity type regardless of the owner count. Partners in venture-backed or growth-equity firms holding carried interest or partnership profits interests, where the partnership itself generates California-source ordinary income alongside the capital gain treatment on carry, should have the PTE election modeled every year the entity has material California taxable income.
The one recurring mistake in this population is defaulting to a single-member LLC for a consulting practice because it is the simplest structure to form, without checking whether an S-corp election on the same LLC would unlock both payroll tax savings on reasonable compensation and PTE election eligibility. That comparison belongs in the same conversation as any equity comp or entity structuring review.
Timing and the Election Mechanics
The election is made annually and is not automatically renewed. For an existing electing entity, California generally requires a prepayment of the greater of $1,000 or 50% of the prior year's elective tax, due by June 15 of the current tax year, to remain eligible to make the election for that year. Missing the June 15 prepayment deadline for an entity that made the election in the prior year forfeits eligibility for the current year, regardless of intent.
The election itself, and the balance of the tax due, is made with the entity's timely filed original return, on FTB Form 3804, along with Form 3893 for the June prepayment voucher. The election is irrevocable for the year once made on a timely filed original return. Because the June 15 prepayment is due well before most entities have finalized their full-year income projection, the prepayment decision itself requires a mid-year estimate of qualified net income, made in coordination with quarterly tax planning rather than as a year-end afterthought.
How Silicon Valley Tax Handles PTE Planning
Our team includes CPAs and EAs who run the PTE election as a standing part of entity tax planning for every qualifying S-corp and partnership client with California-resident owners. That means confirming entity-level eligibility each year against current FTB guidance, projecting qualified net income ahead of the June 15 prepayment deadline so the prepayment amount is calculated correctly rather than guessed, coordinating the owner-level consent and credit calculation with each partner's or shareholder's personal return, and evaluating entity structure (LLC versus S-corp) for consultants and equity-comp owners who are not currently structured to access the election at all. For entities already positioned to elect, this work typically pays for itself well inside the first year. See our entity tax preparation and entity formation services pages for how PTE planning fits into a broader entity strategy, and our equity compensation tax page for how equity income is handled alongside pass-through business income.
FAQ: California PTE Election
What is the California pass-through entity tax election?
It is an elective tax under AB 150 (California Revenue and Taxation Code Section 19900 et seq.) that lets a qualifying S-corporation, partnership, or LLC taxed as a partnership pay California tax at a flat 9.3% rate directly at the entity level. The entity deducts that payment federally as a business expense, and each consenting owner receives a nonrefundable California tax credit for their share, offsetting the personal state tax they would otherwise owe. The net result works around the federal $10,000 SALT deduction cap for the income shifted to the entity level.
Does a single-member LLC qualify for the PTE election?
No. A single-member LLC taxed as a disregarded entity has no separate tax return of its own, so there is no entity-level election available. Only entities that are S-corporations, partnerships, or LLCs taxed as partnerships (meaning at least two members) can make the election. Sole proprietors and single-member LLC owners who want access to this credit generally need to evaluate restructuring, such as adding a member or making an S-corp election, before the workaround becomes available.
What is the June 15 deadline for?
An entity that made the PTE election in a prior year must make a prepayment, the greater of $1,000 or 50% of the prior year's elective tax, by June 15 of the current tax year to remain eligible to elect again for that year. Missing this deadline forfeits eligibility for the current year regardless of the entity's actual income or intent to elect. The final election and remaining balance are then made with the entity's timely filed original return on Form 3804.
How does the PTE election interact with equity compensation?
The election applies to the pass-through entity's ordinary qualified net income. It does not change how equity compensation itself is taxed, ISOs, NSOs, RSUs, and QSBS all remain governed by their own rules regardless of whether the issuing or holding entity has made a PTE election. Where it matters most for equity comp owners is at the entity level: consultants and fractional executives operating through their own S-corp who receive both cash fees and equity, and partners holding carried interest whose partnership also generates California-source ordinary income, should have the PTE election modeled on that entity-level income every year.
Is the AB 150 election still available for tax year 2026?
This is UNVERIFIED as of this writing. AB 150 as originally enacted authorized the election for tax years 2021 through 2025. Whether it has been extended by subsequent legislation for 2026 and later years should be confirmed against current Franchise Tax Board guidance before assuming eligibility. Silicon Valley Tax confirms current-year availability as the first step of every PTE planning engagement rather than relying on the original 2021 sunset date.
Talk to Us Before Your Next Estimated Payment
The PTE election is a use-it-or-lose-it decision made year by year, with a hard prepayment deadline that arrives before most owners have finalized their income picture. Cooper Hathaway and Alfonso Nuñez work with S-corp shareholders, partnership owners, and consultants across the Bay Area to confirm eligibility, model the entity-level tax, and calendar the June 15 deadline before it passes. Book a complimentary consultation or call us at (408) 383-9870 to review whether your entity should be electing.