The PTE tax is a California program that allows pass-through entities (like S-Corps or partnerships/LLCs) to pay state income tax at the entity level — instead of passing all the income down to individual owners who then pay personal income tax.
This helps owners get around the $10,000 federal SALT (State and Local Tax) deduction cap from the 2017 Tax Cuts and Jobs Act.
Key Benefits of Making the PTE Election
Federal Tax Deduction for State Taxes
Normally, individual taxpayers can only deduct up to $10,000 of SALT on their federal returns.
But with the PTE election, the entity pays the California tax and gets the full federal deduction.
This lowers federal taxable income, which reduces your federal tax liability.
Credit for Owners on CA Personal Tax Return
Even though the entity pays the tax, the owners receive a California credit for their share of that payment.
This avoids double taxation — and often results in little or no extra state tax due personally.
Simple Example
Let’s say:
A California S-Corp earns $500,000, owned 100% by one shareholder.
It opts into the PTE and pays 9.3% tax = $46,500 to CA.
That $46,500 is a deduction on the S-Corp’s federal return, saving the shareholder potentially $17,000–$20,000+ in federal tax depending on their bracket.
The shareholder then gets a $46,500 credit on their California tax return.
Prepayment Requirement: This Is Critical
To Make the Election, You MUST Prepay by Specific Deadlines:
June 15 of the taxable year: You must prepay the greater of:
50% of the prior year’s PTE tax, or
$1,000
If you don’t make this payment by June 15, you lose the ability to make the election for that year.
Then:
The remainder is due by the original tax filing deadline (typically March 15 of the next year for calendar-year entities).
No exceptions: Missing the June prepayment disqualifies you from making the election for that year.
Requirements to Qualify
Entity must be a qualified S-Corp, partnership, or LLC taxed as a partnership.
All owners must be individuals, estates, or trusts (not other businesses).
Each owner must consent to the election.
Bottom Line
Bottom Line: Why the PTE Election Matters
Federal deduction – Lowers your federal tax liability beyond the SALT cap.
State credit – You're not double-taxed; you receive a California credit.
Prepayment – Absolutely required by June 15 to make the election.
Strategic tool – Especially beneficial for high-income owners in California.