California AB 150 Pass-Through Entity Tax: Election and Deadlines

California’s AB-150 pass-through entity tax lets partnerships, LLCs taxed as partnerships, and S corporations elect to pay California income tax at the entity level at a flat 9.3% rate, so the payment escapes the federal cap on state and local tax deductions that applies to individuals. Owners then claim a matching credit on their personal California returns for the tax the entity paid on their behalf. The election remains available through the 2030 tax year.

How the Entity-Level Election Works

A qualifying pass-through entity elects to pay California tax at 9.3% on its qualified net income.¹ The business itself writes the check. Each individual partner, member, or shareholder then claims a credit on their California personal return equal to their share of the PTE tax the entity paid.²

The federal savings come from where the deduction sits. When the entity pays the state tax, that payment reduces the income flowing through to the owner’s federal K-1. The federal SALT cap applies to individuals, not to businesses, so an entity-level payment sidesteps the cap. The IRS confirmed this treatment in Notice 2020-75, which allows the partnership or S corporation to deduct the payment and keeps it out of the individual’s SALT limitation.³

Is the Election Still Worth It in 2026?

The federal SALT cap rose to $40,000 for 2025 and $40,400 for 2026, up from the original $10,000 ceiling that prompted AB-150. Even at the higher cap, the election pays off for most California pass-through owners with meaningful income.

Take an S corporation owner whose share of California taxable income is $500,000. At 9.3%, the PTE tax is $46,500. Without the election, only $40,400 of that state tax would clear the federal cap, and that ceiling has to cover property taxes and any other state and local taxes too. With the election, the full $46,500 comes off at the entity level before the income ever reaches the federal return. The higher the California income, the wider the gap. Owners earning solidly into six figures from a pass-through still save thousands in federal tax by electing.

Who Qualifies

The election is open to entities taxed as partnerships or S corporations doing business in California and required to file a California return.⁴ That covers general partnerships, limited partnerships, LLCs classified as partnerships for tax purposes, and S corporations.

On the owner side, only individuals, fiduciaries, estates, and trusts qualify for the credit. Corporate partners and disregarded entities do not.² A mix of individual and corporate owners does not block the election; the entity simply elects on the consenting individual owners’ shares and leaves corporate partners out of the calculation.

Each owner must consent to be included. An owner who refuses is left out of the qualified net income, but their refusal does not stop the entity from electing for everyone else.⁴

What Counts as Qualified Net Income

The 9.3% tax hits the entity’s qualified net income, meaning the combined total of each consenting owner’s share of income subject to California personal income tax. Guaranteed payments to partners under IRC Section 707(c) are included.² If an owner’s share of income is negative, it is dropped from the calculation entirely, and that owner gets no credit for the year.

That rule matters when allocations are uneven. A partnership with three partners where one had a loss year computes PTE tax only on the two profitable partners’ positive shares. The entity does not net the loss against the gains.

Deadlines and the June 15 Payment

The election is irrevocable once made and cannot be filed on an amended return. For tax years 2026 through 2030, the entity elects by filing a completed FTB 3804 with its timely filed original or superseding return.¹ Payment comes in two installments:

By June 15: the greater of $1,000 or 50% of the PTE tax paid for the prior tax year.
By the original return due date (no extensions): the remaining balance.

Missing the June 15 payment does not kill the election, but it costs the owners. If the entity makes a valid election without paying the full June 15 amount, each qualified taxpayer must reduce their PTE credit by 12.5% of their share of the shortfall.¹ On a $100,000 PTE tax bill, skipping the June 15 payment entirely would cost owners $6,250 in lost credit.

How Owners Claim the Credit

Each consenting owner claims the credit on their California personal return using Form 3804-CR. The credit equals 9.3% of the owner’s share of the entity’s income subject to the PTE election.² Because both are calculated at the same rate, the credit generally offsets the California tax the owner would otherwise pay on that same income.

Unused credit carries forward up to five years. That carryforward window is not shortened by any future changes to the PTE program. Owners who missed claiming credits they were entitled to can amend prior-year personal returns to pick them up.

Owners in Multiple States

California residents who are members of pass-through entities in other states should watch how credits interact. California offers an other state tax credit that prevents double taxation when you pay income tax to another state on the same income California taxes.⁵ The credit is claimed by attaching Schedule S, using a separate Schedule S for each state. PTE credits from several states combined with the other state tax credit produce complicated calculations that need careful work.

What the Owner Sees on the Federal Return

Federally, the PTE tax paid by the entity reduces the income reported on each owner’s Schedule K-1. The IRS treats the payment as a deduction from the entity’s income rather than a separately stated item.³ The owner’s federal taxable income from the entity is simply lower, and there is nothing to separately deduct on the individual federal return. That structure is what keeps the payment outside the SALT cap.

NOL Suspension Through 2026

AB-150 originally suspended net operating loss deductions for tax years 2020 through 2022 for taxpayers with business income above $1 million. California has enacted a new suspension covering tax years 2024 through 2026 using the same $1 million threshold.⁶ It applies to individuals and corporations whose net business income or income subject to California tax meets or exceeds $1 million.

The suspension does not erase NOLs. You still compute and carry over losses during the suspension; you just cannot deduct them against current income until it lifts. The carryover period extends by one year for each suspended year, so no loss expires because of the freeze. Disaster loss carryovers are exempt from the suspension.⁶

For owners who were counting on large NOL deductions to offset 2026 income, this means a higher California bill in the near term. The PTE election becomes more valuable in that setting because it shifts part of the state tax burden into a federal deduction at the entity level.

2026 Compliance Checklist

The election needs more advance planning than most California tax provisions. Focus on these steps for 2026:

Run projections comparing total federal and California tax with and without the election. The benefit depends on each owner’s marginal federal rate, their other SALT deductions, and whether they itemize.
Collect written consent from every owner who will be included, well before June 15.
Make the June 15 payment: at least $1,000 or 50% of last year’s PTE tax, whichever is greater. Skipping it costs owners 12.5% of the shortfall in lost credit.¹
File FTB 3804 with a timely original or superseding entity return. An amended return does not count.
Make sure K-1s clearly show each owner’s share of PTE tax paid, so owners can match Form 3804-CR credits to their income.
Keep records of any suspended NOL carryovers and the extended carryover periods. Those losses become deductible again once the suspension ends after 2026, absent further extension.

Entities with out-of-state partners, mixed individual and corporate ownership, or significant guaranteed payments have the most moving parts and the most to gain from modeling the numbers before June 15.

1
State of California Franchise Tax Board. Pass-Through Entity (PTE) Elective Tax
2
State of California Franchise Tax Board. Help With Pass-Through Entity (PTE) Elective Tax
3
Internal Revenue Service. Notice 2020-75
4
California Legislative Information. California Revenue and Taxation Code 19900
5
State of California Franchise Tax Board. Other State Tax Credit
6
State of California Franchise Tax Board. Net Operating Loss