The California PTE Elective Tax Credit

Overview of the California PTE Elective Tax

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The California pass-through entity elective tax is an annual election available to certain partnerships and S corporations. It was enacted to mitigate the federal limitation on an individual’s deduction for state and local taxes under I.R.C. § 164(b)(6) by allowing the entity itself to pay qualifying California tax at the entity level. California then provides a corresponding credit to qualified taxpayers that consent to inclusion of their income in the entity’s qualified net income.

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For taxable years beginning on or after January 1, 2026, and before January 1, 2031, California continues the elective PTE regime under Part 10.4.1 and section 17052.11.

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Key Benefits

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Federal tax benefit: If otherwise allowable for federal purposes, the entity-level California PTE tax may be deductible by the entity and is not treated as an individual owner’s itemized SALT deduction subject to the I.R.C. § 164(b)(6) cap.

California tax credit: Each qualified taxpayer that consents to participate generally receives a California credit equal to 9.3 percent of that taxpayer’s guaranteed payments and distributive or pro rata share of income included in the electing qualified entity’s qualified net income.

Carryover: If the credit exceeds California net tax, the unused portion may be carried forward for up to five years.

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Who Can Participate

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Eligible entities generally include partnerships and S corporations that meet California’s qualification rules.

Qualified taxpayers generally include individuals, trusts, estates, and certain qualifying disregarded single-member LLC structures, if they are partners, shareholders, or members of the electing qualified entity and consent to inclusion of their items in qualified net income.

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A qualified entity may have a partner, member, or shareholder that is a partnership, although not every such owner will necessarily be a qualified taxpayer entitled to the credit.

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What Is Expected of the Taxpayer

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Consent: Only consenting owners’ distributive or pro rata shares of income and guaranteed payments are included in the entity’s qualified net income.

Claiming the credit: Qualified taxpayers must claim the credit on their own California returns. The credit cannot be claimed on a California nonresident group return.

Coordination with other state tax credits: California credit ordering rules require adjustment of net tax by the amount of PTE credit used when computing the other state tax credit.

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Important Due Dates

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Election: The entity must make the election annually on a timely filed original return. The election is irrevocable for that year.

Payments for taxable years beginning on or after January 1, 2026, and before January 1, 2031:

First payment: Due by June 15 of the taxable year. The amount due is the greater of $1,000 or 50 percent of the elective tax paid for the prior taxable year.

Second payment: Due by the original due date of the return, without regard to extensions, for the remaining balance.

Payments must be made separately from other tax payments using the Franchise Tax Board’s prescribed payment methods, generally Web Pay, electronic funds withdrawal if supported, or Form FTB 3893.

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Additional Considerations

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• For taxable years beginning on or after January 1, 2026, failure to make the June 15 payment no longer invalidates the election. Instead, the qualified taxpayers’ credits are reduced by 12.5 percent of their pro rata share of the amount due but not paid by June 15.

• The election does not affect the requirement to withhold 7 percent on distributions to nonresident owners.

• If the entity deducts the PTE tax for federal purposes, the deducted amount must be added back for California purposes in computing California net income.

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Summary

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The California PTE elective tax remains a useful tool for eligible pass-through entities and their owners. For taxable years beginning in 2026 through 2030, the election must still be made on a timely filed original return, and the entity must still satisfy California’s payment rules. The principal 2026 change is that missing or underpaying the June 15 payment no longer destroys the election, but it does reduce the owner-level credit. Careful attention to eligibility, consent, payment timing, and return reporting remains essential.

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How To Pay

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To make a payment online for the California Pass-Through Entity (PTE) Elective Tax using the Franchise Tax Board’s (FTB) Web Pay system, follow these detailed steps:

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1. Access the FTB Web Pay System

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• Go to the California Franchise Tax Board’s website: https://www.ftb.ca.gov

• Navigate to the “Web Pay” section. This can typically be found under “Make a Payment” or by searching for “Web Pay” in the site’s search bar.

• Select “Web Pay for Businesses” (since PTEs are business entities).

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2. Log In or Proceed as a Guest

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• You may log in using your MyFTB account for additional features, but it is not required. You can proceed as a guest by providing the entity’s information.

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3. Select the Type of Payment

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• Choose the payment type as “Pass-Through Entity Elective Tax.”

• Ensure you do NOT combine this payment with other entity tax payments (such as annual franchise tax or LLC fee). The PTE elective tax payment must be made separately.

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4. Enter Entity Information

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• Enter the entity’s:

  • Federal Employer Identification Number (FEIN)

  • California Corporation Number or Secretary of State (SOS) file number (if applicable)

  • Legal business name

  • Contact information

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5. Enter Payment Details

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• Specify the tax year for which the payment is being made (e.g., 2026).

• Enter the payment amount. For the first payment (due by June 15), pay the greater of $1,000 or 50% of the elective tax paid for the prior taxable year. For the second payment (due with the return), pay the remaining balance.

• Select the payment date (the date you want the payment to be processed).

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6. Select Payment Method

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• Choose your payment method (bank account information for ACH debit is required).

• Enter the bank routing number and account number.

• Confirm the account type (checking or savings).

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7. Confirm and Submit

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• Review all entered information for accuracy.

• Confirm that the payment is for the “Pass-Through Entity Elective Tax.”

• Submit the payment.

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8. Retain Confirmation

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• After submission, you will receive a confirmation number and a summary of your payment.

• Print or save this confirmation for your records.

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Special Notes and Codes:

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• When making the payment, ensure you select the correct payment type (“Pass-Through Entity Elective Tax”) to ensure the payment is properly applied.

• Do not use the payment voucher (FTB 3893) if paying online; the voucher is only for check payments by mail.

• If your entity is subject to mandatory e-pay (total tax liability, including PTE elective tax, exceeds $80,000, or any single payment over $20,000), you must use Web Pay or another electronic method.​

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​​​Additional Tips:

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• Payments made via Web Pay are posted immediately to the entity’s account.

• If you experience technical issues, contact the FTB for assistance.

• For future reference, the FTB may update the Web Pay interface, so always follow on-screen instructions and verify you are selecting the correct payment type.

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By following these steps, you will ensure your California PTE Elective Tax payment is made correctly and timely using the FTB’s Web Pay system.