California Enacts a Pass-Through Entity Tax as a SALT Cap Workaround

August 30, 2021

California State Capital

By: Jeff Glickman, SALT Partner

At a glance

  • The main takeaway: With the signing of AB 150, California is the latest of several states to establish an elective pass-through entity (PTE) tax.
  • Impact on your business: The PTE tax is intended to be a workaround to the federal $10,000 cap on the deduction for state and local taxes (SALT).
  • Next steps: Aprio’s State and Local Tax (SALT) team can help PTEs and their owners evaluate both the federal and state income tax consequences of making this new election.

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The full story:

On July 16, 2021, California Governor Gavin Newsom signed into law AB 150, which establishes the state’s elective PTE tax. In doing so, California joined a growing number of states that have enacted similar regimes designed as a workaround to the federal $10,000 cap on the deduction for state and local taxes, especially following IRS Notice 2020-75 that recognized the deduction for PTE taxes paid.[1] As of this writing, over 20 states have enacted PTE taxes or have similar legislation pending.[2]

Below is a summary of some of the provisions of the state’s PTE tax:

  • The PTE tax is effective for tax years beginning on or after January 1, 2021, and before January 1, 2026. However, the law may be repealed earlier if Congress repeals the $10,000 cap.
  • The PTE tax is in addition to any other tax imposed on the PTE, including the 1.5% corporate tax on S corporations.
  • Entities are eligible to make the PTE tax election if they are taxed as partnerships or S corporations and they are owned exclusively by individuals, estates, trusts, fiduciaries or corporations. Therefore, if an entity has a partnership as an owner, then the PTE is ineligible to make a PTE tax election. Also excluded are publicly traded partnerships and entities that are permitted or required to be in a combined reporting group.
  • The PTE tax election is made annually on an original, timely-filed return and is irrevocable. The Franchise Tax Board will provide more information about the form and manner for making the election.
  • The PTE tax is imposed at the rate of 9.3% on qualified net income, which includes the distributive share of income of any consenting owner that is an individual, fiduciary, estate or trust. Several points are notable here:
    • While corporate owners don’t disqualify the PTE from electing into the PTE tax, distributive shares of income to corporate owners are not included in the PTE tax base. Corporate owners will include their California income and pay California tax at the corporate level.
    • The PTE will include in the PTE tax base only the distributive share of income of owners that have provided consent, and the failure of some owners to provide consent does not prevent the PTE from electing into the PTE tax. More guidance is needed on the manner and timing for such consent.
    • A resident owner’s full distributive share of income will be included in the PTE tax base. For nonresident owners, the PTE tax base will include their distributive share of the PTE’s California-source income.
  • For tax years beginning during 2021, the PTE tax is due in full on or before the due date of the PTE’s original tax return, without regard to extensions.
  • For tax years beginning after 2021, payment of the PTE tax is made in two installments. The first installment is due on or before June 15 of the taxable year in an amount equal to the greater of 50% of the prior year’s PTE tax or $1,000. The balance of the PTE tax liability is paid as the second installment and is due on or before the due date of the PTE’s original tax return, without regard to extensions. A PTE that fails to make the first installment is ineligible to make the PTE tax election for the taxable year.
  • Owners that consented to have their PTE income included in the PTE tax base are entitled to a credit against their income tax liability in an amount equal to 9.3% of their distributive share of PTE income included in the PTE tax base. If the credit exceeds the owner’s income tax liability, the unused credit is available to be carried forward for the next five taxable years.

Although these PTE taxes are designed to reduce the owner’s federal income tax liability, there may be state income tax consequences for making the election that taxpayers need to consider. For example, a nonresident owner may not want to consent if the owner’s state of residence would not provide a credit for the PTE tax paid. Also, since the credit is nonrefundable, a resident owner that expects to be in a California tax bracket lower than 9.3% may not want to consent.

The bottom line

Ultimately, the decision to participate in these new PTE tax regimes, both at the entity and owner level (at least in states where owners have the flexibility to not participate), is complicated — particularly in situations where the PTE operates in multiple states and has owners residing in different states, since the impact on each owner will be unique.

Aprio’s SALT team is familiar with these new rules and can help PTEs and their owners evaluate both the federal and state income tax consequences of making the election. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the August 2021 SALT newsletter.

[1] For our article on IRS Notice 2020-75 recognizing the deduction for PTE taxes paid, see the Nov./Dec. 2020 SALT Newsletter. That article also contains links to prior articles that we have done on PTE taxes.

[2] Our April 2021 SALT Newsletter contains an article summarizing similar legislation in Georgia and New York.


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.