The Pass-Through Entity Tax (PTET) may be the only time your tax-planning expert or tax preparer encourages you to pay an optional tax now. The PTET is a valuable tax credit that can mean substantial tax savings for high-income California business owners. The tax-planning strategy can help you get around the costly state and local tax cap (from the 2017 Trump tax plan) and turn non-deductible state taxes into valuable tax savings.
Similar pass-through entity strategies exist in other states, and residents in these states see their tax bills skyrocket due to limited state and local tax deductions.
If you are only speaking with your tax preparer once a year when you file your taxes, you are likely missing out on a substantial tax savings strategy. You would essentially be leaving the IRS a ginormous tip. If you want to donate to your favorite nonprofit, do that. There is no reason to send the IRS extra money.
The higher your household income, the larger the benefits from the PTET strategy could be. The deadline to elect to take the PTET tax deduction in California is June 15, 2025.
You can benefit from this California tax-planning strategy even if your self-employed income is a relatively small portion of your household income. This is why it’s important to have a proactive financial planner who specializes in tax planning on your side, helping you make smarter financial moves throughout the year.
You may also hear the PTET elective tax called a SALT CAP workaround. It is a way for Californians to fight back against what many see as a retaliatory provision in the Trump tax plan against blue states.
How Does The PTET Tax Strategy Save Me Money?
The Trump Tax Plan severely limited tax deductions for state and local taxes (SALT) to just $10,000 yearly. The SALT cap is the same whether you file as single or married. This one part of the Tax Cuts and Jobs Act (TCJA) was a big slap in the face for high-income Californians and married couples, for that matter.
A common example is if you own a home in California, your property taxes are likely close to or higher than the $10,000 SALT cap. This is even before looking at your California state income taxes, which we know you incur to afford your house. Again, the SALT cap is just $10,000 whether you are single or married.
With your proactive pass-through entity tax payment, you essentially have your business pay your state income taxes. This helps turn those costs into fully deductible business expenses, getting around the $10,000 SALT cap. The higher your income, the bigger the PTET tax savings.
This strategy is also beneficial for taxpayers who elect the standard deduction. If this is how you file your personal return, you can get a new business deduction for SALT taxes paid via the PTE elective tax.
Who Should Use The PTET Tax-Planning Strategy?
To take advantage of the pass-through entity tax in California, you need to run your business as a partnership or S corporation. If you work at a publicly traded partnership, you will not be eligible for the PTET.
How To File Your PTE Election For 2025
Your first annual PTE election is made on an original, timely filed tax return. Once the filing election is made, it is irrevocable for that year and is binding on all partners, shareholders and pass-through entity members.
PTET For Tax Years 2022 To 2025
For tax years beginning on or after January 1, 2022, and before January 1, 2026, the PTE election must be made when the tax return for the taxable year is filed, and the PTE must make an initial payment by June 15 during the tax year.
The initial payment CANNOT, I repeat CANNOT, be made when filing your taxes after the tax year has ended.
I am mentioning prior tax years here to help you determine if you have missed out on tax savings over tax years 2022 and 2023. If you believe you were eligible for the PTET in the past, it may be worth inquiring why your financial advisor, tax preparer or CPA didn’t tell you about this valuable tax-planning strategy.
When Is The PTE Tax Payment Due?
Your tax payments must be made within specific time frames and by certain deadlines.
2022 To 2025 Taxable Years
Use the following table from the Franchise Tax Board:
Payment dates
Due
Payment
On or before June 15, during the taxable year of the election
Payment 1
Pay $1,000 or 50% of the elective tax paid for the prior taxable year, whichever is greater.
On or before the due date of the original return without regard to extensions
Payment 2
Pay the remaining amount.
Don’t worry; all these dates and figures may seem complicated. Once you’ve gotten your tax team on board with the PTET strategy, they should be able to calculate the required payments for you easily.
How To Make Your PTE Tax Payments For 2025
Tax payments aren’t much fun, but you still want to make them correctly. All PTE elective tax payments can be made using the free Web Pay application, accessed through the Franchise Tax Board’s (FTB) website, Do not try to combine your PTE payments with other tax payments. Once made, your PTE payments will remain coded as a PTE elective tax payment until your business tax return is eventually filed.
How To Claim Your PTE Tax Credit
Qualified taxpayers can claim their PTE credit on their personal tax returns.
Remember, you must elect and make the first payment toward your California pass-through entity tax by June 15, 2025.
If you believe you qualify to benefit from this tax strategy and your tax person or financial advisor is not up to the task of guiding you through this process, it may be time to upgrade to financial professionals who meet your current personal and business financial planning and tax-planning needs.
Reminder, you will need to elect the California PTET tax strategy by the headlines listed above. If you put off your tax planning until the last minute, or when you are filing your taxes, you tax savings will be limited or even eliminated. You work too hard to pay unnessary taxes each year.
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