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

California’s AB-150 pass-through entity tax lets partnerships, LLCs taxed as partnerships, and S corporations elect to pay California income tax at a flat 9.3% rate at the entity level, so the payment reduces federal taxable income before it reaches owners’ personal returns and avoids the federal state and local tax (SALT) deduction cap. Owners then claim a matching credit on their California personal return for their share of the tax the entity paid. The election is available through the 2030 tax year.

How the Election Works

A qualifying pass-through entity pays 9.3% on its “qualified net income,” which is the combined total of each consenting owner’s share of income subject to California personal income tax.¹ Because the entity, not the individual, writes the check, the payment is treated as a business expense that reduces the income flowing through on the federal K-1. The IRS confirmed in Notice 2020-75 that these entity-level state tax payments are deductible by the partnership or S corporation and are not subject to the individual SALT limitation.²

On the owner side, each consenting partner, member, or shareholder gets a California tax credit equal to 9.3% of their share of the electing income.³ At the state level the owner is roughly in the same place either way. The savings happen on the federal return.

Why It Still Saves Money in 2026

The federal SALT cap rose to $40,000 in 2025 and $40,400 in 2026, well above the original $10,000. Even so, the PTE election still pays off for most California owners with meaningful pass-through income.

Take an S corporation owner whose share of California taxable income is $500,000. The California tax at 9.3% comes to $46,500. Without the election, that state tax lands on the owner’s personal return and competes with property taxes and other state and local taxes for the $40,400 federal deduction cap. With the election, the full $46,500 reduces federal taxable income at the entity level, before anything flows through. The higher the California income, the wider that gap.

Who Can Elect, and Whose Income Counts

The election is available to entities taxed as partnerships or S corporations doing business in California, including general partnerships, limited partnerships, LLCs classified as partnerships, and S corporations.⁴ The entity must be required to file a California return.

Only certain owners qualify to receive the credit: individuals, fiduciaries, estates, and trusts. Corporate partners and disregarded entities do not qualify.³ A mixed ownership structure does not block the election. The entity pays PTE tax only on the consenting qualified owners’ shares, and corporate partners are simply excluded from the calculation.

Consent is owner by owner. A partner or shareholder who refuses is left out of the qualified net income computation, but their refusal does not stop the entity from electing for everyone else.⁴ Guaranteed payments under IRC Section 707(c) are included in qualified net income.³ If an owner’s share of income is negative, it is excluded entirely, and that owner gets no credit for the year. The entity does not net losses against gains for this purpose, so a partnership with three partners and one loss year computes PTE tax only on the two positive shares.

Deadlines and the Two Required Payments

The election is irrevocable once made and cannot be filed on an amended return. For tax years 2026 through 2030, the entity makes the election by filing a completed FTB 3804 with a timely original or superseding return.¹ Two payments are required:

By June 15 of the tax year, pay the greater of $1,000 or 50% of the PTE tax paid for the prior tax year.
By the original return due date (without regard to extensions), pay the remaining balance.

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

How Owners Claim the Credit

Each consenting owner claims the credit on Form 3804-CR with their California personal return. The credit equals 9.3% of their share of the income subject to the election, which generally offsets the additional California tax they would otherwise owe on that same income.³ If the credit exceeds the owner’s California tax for the year, the unused portion carries forward for up to five years. Owners can also amend prior-year personal returns to claim PTE credits they were entitled to but missed.

On the federal return, there is nothing extra for the owner to deduct. The PTE tax paid by the entity reduces the income reported on each K-1, so federal taxable income from the entity simply comes in lower.² That is what keeps the payment outside the SALT cap.

California residents who are also members of pass-through entities in other states should know that California offers an “other state tax credit” to prevent double taxation on the same income, claimed by attaching Schedule S (one per state) to the California return.⁵ The interaction with PTE credits from multiple states gets complicated quickly and usually calls for a tax advisor.

The NOL Suspension Running Alongside

AB-150 also suspended net operating loss deductions for 2020 through 2022 for taxpayers with business income over $1 million. California has since enacted a new NOL suspension for tax years 2024 through 2026, using the same $1 million threshold, affecting both individuals and corporations with net business income or California-taxable income at or above that mark.⁶

The suspension does not eliminate NOLs. You can 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, and disaster loss carryovers are exempt from the suspension entirely.⁶ For owners who were counting on large NOL deductions to soften 2026 income, the PTE election becomes more valuable, because it shifts part of the state tax burden into a federal deduction that the suspended NOL cannot.

A 2026 Compliance Checklist

Run projections comparing total federal and California tax with and without the election. The benefit depends on each owner’s marginal federal rate, 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 prepayment of at least $1,000 or 50% of the prior year’s PTE tax, whichever is greater.
Pay the remaining balance by the original return due date, without regard to extensions.
File FTB 3804 with a timely original or superseding entity return. An amended return will not work.
Make sure each K-1 clearly reflects the PTE tax paid, and have each qualified owner file Form 3804-CR with their personal return.
If the entity or its owners have suspended NOLs, keep records of the extended carryover periods for when the suspension ends after 2026.

Entities with complex ownership, out-of-state partners, or significant guaranteed payments gain the most from modeling the election with a tax advisor who can see how the California PTE tax, the federal SALT cap, and each owner’s situation fit together.

1
State of California Franchise Tax Board. Pass-Through Entity (PTE) Elective Tax
2
Internal Revenue Service. Notice 2020-75
3
State of California Franchise Tax Board. Help With Pass-Through Entity (PTE) Elective Tax
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