California SALT Tax: The $40K Cap, Phase-Down, and PTE Election

For the 2026 tax year, the California SALT deduction cap on your federal return is $40,400 for single filers, heads of household, and married couples filing jointly, with married-filing-separately taxpayers limited to $20,200.¹ The cap phases down for higher earners and bottoms out at $10,000 once modified adjusted gross income climbs high enough. California business owners can bypass the cap entirely on their share of pass-through income by electing the state’s pass-through entity (PTE) tax.

What California Taxes Count Toward the Cap

Two California taxes compete for the same federal cap: state income tax and local property tax. Both get added together on Schedule A.²

California’s personal income tax runs through nine brackets from 1% to 12.3%, with an extra 1% Mental Health Services Tax on taxable income above $1 million. That brings the effective top rate to 13.3%.³ Every dollar you pay during the year counts.

Property tax is the other half. Proposition 13 limits the base rate to 1% of assessed value, plus voter-approved bonds and local assessments.⁴ Effective rates typically land between 1.1% and 1.5%. On a $1 million assessed home, that’s $11,000 to $15,000 a year before state income tax enters the picture.

You can elect to deduct state and local general sales taxes instead of income taxes, but not both. For almost every California resident the election is a loser, because California income tax dwarfs sales tax for anyone with meaningful income.

The Phase-Down Above $505,000

The $40,400 figure is a starting point, not a guarantee. Once modified adjusted gross income passes $505,000 ($252,500 for married filing separately), the cap shrinks by 30 cents for every dollar above the threshold until it hits the $10,000 floor.¹

A single filer with $600,000 of modified AGI is $95,000 over the threshold. Multiply by 30%, and the cap drops by $28,500, leaving $11,900 of usable SALT deduction. By roughly $606,333 of modified AGI, the cap is back at $10,000 and the expanded limit does nothing. In a state where six-figure state tax bills are routine among high earners, the phase-down means the higher cap mostly helps middle- and upper-middle-income households.

How Long the Higher Cap Lasts

The expanded cap is temporary. The dollar amounts tick up by 1% each year through 2029, then revert to a flat $10,000 starting in 2030.¹ Any planning that depends on today’s cap needs to account for that sunset.

The Pass-Through Entity Workaround

California enacted the pass-through entity elective tax in 2021 under Assembly Bill 150, the Small Business Relief Act.⁵ The mechanics are straightforward. The business pays California income tax at the entity level on its qualified net income. That payment is a business expense that reduces the entity’s federal taxable income before anything flows out to the owners, so the SALT cap never touches it. The IRS confirmed this treatment in Notice 2020-75.⁶

The entity-level rate is a flat 9.3% on qualified net income, regardless of the owners’ personal brackets.⁵ The program was originally scheduled to end after 2025 but has been extended to taxable years beginning before January 1, 2031.⁷

Who Qualifies

Eligible entities are partnerships (general and limited), S corporations, and LLCs taxed as partnerships. Sole proprietorships, publicly traded partnerships, and disregarded entities are out.⁸

Each owner has to opt in individually by consenting to include their full share of income and guaranteed payments in the entity’s qualified net income.⁷ Consent doesn’t have to be unanimous. The entity can still elect if some owners opt out, but only consenting owners’ income is taxed at the entity level and only those owners get the credit.

SB 113, enacted in 2022, broadened eligibility. Entities with partnerships as direct owners now qualify, and individual owners holding their interest through a disregarded single-member LLC can participate as long as the LLC is ultimately owned by an individual, fiduciary, estate, or trust subject to California personal income tax.⁹

The June 15 Deadline That Costs Elections

The election requires a prepayment on June 15 of the tax year equal to the greater of $1,000 or 50% of the prior year’s PTE elective tax.¹⁰ Miss it, or come up short, and the entity is locked out of the election for the entire year. There is no cure. This deadline arrives months before the entity’s tax return is due, which is exactly why businesses miss it.

Payment goes through the Franchise Tax Board’s Web Pay portal or by mail with Form FTB 3893.⁷ The final calculation is reported on Form FTB 3804, filed with the entity’s state return: Form 100S for S corporations, Form 565 for partnerships, or Form 568 for LLCs.¹¹

Claiming the Credit on Your 540

Paying at the entity level is only half of the trade. Each consenting owner then claims a corresponding California credit on their personal return using Form FTB 3804-CR, attached to Form 540.¹² Without this credit, the same income gets taxed twice at the state level.

A few mechanics are worth knowing:

The credit is nonrefundable. It can zero out your California tax but won’t produce a refund by itself. Unused amounts carry forward for up to five years.
Married couples get one credit. If you file separately, either spouse can claim the full credit or you can split it equally.
No payment, no credit. If the entity didn’t actually elect in and pay the tax, there is nothing to claim.

SB 113 also made the credit more useful by letting it reduce regular tax below the tentative minimum tax, which the original statute didn’t permit.⁹

Is the PTE Election Still Worth It at the Higher Cap

With the cap now at $40,400 instead of $10,000, some owners ask whether the election is still worth the paperwork. For most, yes.

Take a married couple filing jointly who own an S corporation generating $500,000 of California-source income. California tax on that income at 9.3% is $46,500. Add $15,000 of property tax and the SALT total is $61,500, well above the $40,400 cap. Without the election, the federal deduction on $21,100 of that is lost. With the election, the $46,500 comes off as an entity-level business deduction with no cap, and the property tax still fits inside the $40,400 personal limit.

For owners with modified AGI above $505,000, the cap is already phasing down toward $10,000.¹ For them, the PTE election is just as valuable as it was under the old flat cap. The expanded limit mainly helps homeowners with moderate incomes, not the high earners the PTE election was built for.

The extension through 2030 gives California business owners a real planning window. Put June 15 on the calendar first.

1
Office of the Law Revision Counsel. 26 USC 164 – Taxes
2
Internal Revenue Service. Topic No. 503, Deductible Taxes
3
Franchise Tax Board. Bill Analysis, AB 1219 – Personal Income Tax Reduction
4
California State Board of Equalization. California Property Tax – An Overview
5
Franchise Tax Board. Pass-Through Entity Elective Tax
6
Internal Revenue Service. Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes
7
Franchise Tax Board. Pass-Through Entity Elective Tax
8
Franchise Tax Board. Help With Pass-Through Entity (PTE) Elective Tax
9
Franchise Tax Board. Pass-Through Entity Elective Tax Update
10
Franchise Tax Board. Instructions for Form FTB 3893 Pass-Through Entity Elective Tax Payment Voucher
11
Franchise Tax Board. 2025 Instructions for Form FTB 3804 – Pass-Through Entity Elective Tax Calculation
12
Franchise Tax Board. 2024 Instructions for Form FTB 3804-CR