A new California law has gone into effect that impacts how you make your pass-through entity election (PTE). Not knowing how this law works can cost you money.
You are no longer precluded from making a pte election and paying your required tax obligation past the June 15th deadline. To be clear, you are still sacrificing a tax credit that you may deserve if you wait past this deadline to act. Proper tax planning now can save you money when it comes time to file your 2026 California tax return.
Schedule an appointment with a tax planning professional at Moskowitz, LLP, to take advantage of your full ability to receive a tax credit for state and local taxes that your business pays. Make an appointment with our professionals by calling us today at (888) TAX-DEAL (829-3325).
You May Qualify for a PTE Tax Credit Under California Law
Although the One Big Beautiful Act raised the so-called SALT Cap from its previously low level, there are still instances in which higher-income taxpayers may not be able to deduct all of the state and local taxes on their federal return. California is one of the several states that have adopted workarounds that allow partnerships and S Corporations to pay taxes at the entity level. This measure allows these taxpayers to receive a tax credit on their California return.
In the past, taxpayers who intended to avail themselves of this option were required to prepay at least 50% of their tax obligations by June 15 of the tax year. They were also required to make the election to pursue this option by that date, and the choice was irrevocable. Missing this deadline, or underpaying the amount of taxes due previously kept these taxpayers from being able to receive the credit. Mistakes or untimeliness had profound consequences and resulted in increased tax liability.
SB 132 Reduces Harsh Consequences for Missing the June 15th Deadline
On January 1, 2026, SB 132 became law in California. The new law softened some of the consequences for missing the June 15 deadline. Under the new law, taxpayers can still receive the full amount of the credit if they meet the prepayment deadline. However, they can still receive a large part of the credit if they act after the deadline.
Now, you can still make a PTE election after June 15 or pay your required portion of your taxes between then and the end of the tax year. There is still a penalty for missing the deadline. The new law imposes a penalty of 12.5% of the amount of taxes that you must have paid by June 15. For example, if you needed to pay $30,000 as your part of estimated taxes (based on your tax liability from the prior year), and you missed the date, your credit would be reduced by $3,750. If you paid part of your taxes by June 15, but the amount you paid was less than 50%, your credit is reduced by 12.5% of the underpayment.
Even though the consequences of not acting early in the year have been reduced, the June 15 deadline still matters. You must still act now to be able to receive the full amount of the credit. There are still no exceptions that allow you to receive the full credit for missing the deadline, other than disaster relief.
What California Business Owners Must Do Now
As a business owner, you should do the following to prepare for this election and prepayment:
- Review your prior year elective tax liability to determine how much you need to pay now
- Determine whether it still makes sense for you to make a PTE election in light of the changes made by OBBA
- Forecast your business cash flow, so you have enough money available to prepay in time for the deadline
- Document the agreement among the business owners to make the PTE election
Given the new rules and the potential complexities involved in your individual situation, you should contact a tax planning professional. We can work to better your own tax outcomes by advising you of the recent changes to the law and how they affect you.
Contact a Tax Planning Professional
The experienced tax planning professionals at Moskowitz, LLP can help you minimize your tax liability through effective use of California law. To schedule an appointment with our firm, message us online or call us today at (888) TAX-DEAL (829-3325).
