Why Making a California PTE Payment Still Makes Sense After OBBBA
The One Big Beautiful Bill Act (OBBBA) raised the state and local tax (SALT) deduction cap from $10,000 to $40,000 for married filing jointly through 2029. At first glance, this might seem to reduce the need for California business owners to make a Pass-Through Entity (PTE) tax election. But in reality, for many high-income filers and owners of S corporations, partnerships, or LLCs, the PTE election continues to offer significant benefits.
What Changed Under OBBBA
Before OBBBA, individuals could only deduct up to $10,000 in total state and local taxes on their federal returns. OBBBA temporarily increased that cap to $40,000 from 2025 through 2029, after which it is scheduled to revert back to $10,000 unless Congress acts again.
However, OBBBA left intact the state-level PTE tax systems that let eligible pass-through entities pay state income tax at the entity level, deducting that payment before income flows to the owners. This is crucial because it allows businesses to bypass the federal SALT cap entirely.
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Why the PTE Election Still Matters in California
1. High-Income Filers Still Face a Cap
The new $40,000 limit phases out for higher earners. Once modified adjusted gross income exceeds the federal threshold (around $500,000 for joint filers), the allowable deduction begins shrinking—eventually dropping back near the original $10,000 cap. For high-income Californians, who already pay some of the highest state income taxes in the country, the PTE deduction continues to provide substantial savings.
2. Entity-Level Deduction Reduces Taxable Income
When a PTE pays California income tax at the entity level, that payment is fully deductible for federal purposes. This lowers the business’s taxable income before it passes through to the owners, effectively reducing the owner’s federal adjusted gross income (AGI). Lower AGI can also help preserve eligibility for deductions and credits that phase out at higher income levels.
3. Better Treatment Under AMT Rules
State and local taxes are not deductible under the Alternative Minimum Tax (AMT). But a PTE tax paid at the entity level reduces federal taxable income before AMT adjustments, providing a cleaner benefit without triggering AMT limitations.
4. The $40,000 Cap is Temporary
The higher SALT cap only applies from 2025 to 2029. After that, the deduction is scheduled to return to $10,000. Continuing to make PTE payments ensures consistent tax planning, avoids short-term swings in policy, and secures deductions that might not be available later.
5. California’s PTE Regime is Generous and Flexible
California’s elective PTE tax allows eligible entities to pay a 9.3% tax on qualified net income at the entity level. Owners receive a dollar-for-dollar credit on their California individual returns for their share of that payment. This setup effectively shifts the deduction from the limited individual level to the fully deductible entity level.
When the PTE Election May Offer Limited Benefit
The PTE election may not be worthwhile if:
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Total state and local taxes are below the $40,000 cap.
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The taxpayer has relatively low income and does not face the SALT phase-out.
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The business operates in multiple states where PTE elections create administrative complexity.
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Compliance costs outweigh potential savings.
Key Takeaways
Even with the higher SALT deduction cap, most high-income Californians will still benefit from making a PTE election. The entity-level deduction continues to offer federal tax savings, reduces AGI, and protects against future uncertainty once the $40,000 limit expires.
California’s program remains one of the most favorable in the country, and as long as the PTE election is available. It should stay a key part of a smart tax strategy for eligible businesses.
