Navigating the Pass-Through Entity Tax (PTET): A Strategic Tax-Saving Opportunity for Californians

What Is the PTET and Why Should You Care?

In the world of taxes, it’s rare for tax professionals to encourage you to pay taxes sooner. However, the Pass-Through Entity Tax (PTET) is one of those rare exceptions. Essentially, it’s a tax credit that can offer significant savings for high-income California business owners. By leveraging the PTET, you can sidestep the costly state and local tax (SALT) cap introduced by the 2017 Trump tax plan and transform non-deductible state taxes into valuable savings. If you’re only speaking with your tax preparer once a year, you might be missing out on this opportunity to keep more of your hard-earned money. Think of it this way: if you’re not taking advantage of the PTET, you’re essentially giving the IRS an unnecessary “tip.”

How Does the PTET Work to Save You Money?

The PTET strategy is often referred to as a “SALT CAP workaround.” The Trump Tax Plan limited state and local tax deductions to just $10,000 annually, a provision that disproportionately impacted high-income individuals and families in high-tax states like California. For example, if you own a home in California, your property taxes alone could exceed the $10,000 SALT cap, and that’s before even considering your state income taxes. The PTET allows your business to pay your state income taxes, turning those payments into fully deductible business expenses. This means you can bypass the SALT cap and enjoy bigger tax savings as your income increases.

Who Should Consider the PTET Strategy?

The PTET is particularly beneficial for California business owners who operate as partnerships or S corporations. Unfortunately, publicly traded partnerships are ineligible for this tax strategy. Even if self-employment income makes up a smaller portion of your household income, the PTET can still provide significant tax benefits. That’s why it’s crucial to have a proactive financial planner or tax professional on your side—someone who can help you make informed decisions throughout the year, not just during tax-filing season.

Filing Your PTE Election: Deadlines and Requirements

To take advantage of the PTET, you need to make an annual election on your tax return. For the 2025 tax year, the deadline to elect the PTET is June 15, 2025. This election is irrevocable for that year and applies to all members of the pass-through entity, such as partners, shareholders, or members. If you’ve missed out on this opportunity in previous years (2022 and 2023), it’s worth revisiting your past returns to see if you were eligible. If your financial advisor or tax preparer didn’t mention the PTET, it might be time to seek a second opinion from a professional who specializes in tax planning.

Making PTE Tax Payments: Key Dates and Details

The process of making PTET payments is straightforward but requires attention to deadlines. For tax years 2022 to 2025, the first payment must be made by June 15 during the taxable year. This payment cannot be delayed until you file your taxes after the year has ended. The first payment is either $1,000 or 50% of the elective tax paid in the previous year, whichever is greater. The second payment, which covers the remaining amount, is due by the original filing deadline of your tax return. All payments can be made using the Franchise Tax Board’s (FTB) free Web Pay application, but they must be made separately from other tax payments.

Claiming Your PTE Tax Credit and Taking Action

Once you’ve made your PTET payments, you can claim the corresponding tax credit on your personal tax return. Remember, the deadline to elect the PTET for the 2025 tax year is June 15, 2025. If you qualify for this strategy but your current tax preparer or financial advisor isn’t guiding you through the process, it’s time to upgrade to a professional who can meet your needs. Procrastinating on tax planning or waiting until the last minute to file can limit or even eliminate the savings you could enjoy. Don’t let unnecessary taxes eat into your hard-earned income—take control of your financial future with the PTET strategy.