What is California's Pass-Through Entity Tax (PTE)?

What is California's Pass-Through Entity Tax (PTE)?

February 17, 2023

The Pass-Through Entity Tax (PTE) was adopted in response to the Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in 2017. Starting with tax year 2018, the law limits one’s federal income tax deduction of State and Local Taxes (SALT) to just $10,000. Previously there was no limit.

Residents in states such as California and New York were hit particularly hard because of their high state income tax rates. So, most high-income California taxpayers were paying SALT taxes far in excess of $10,000 per year.

PTE tax allows an entity taxed as a partnership or S Corporation to make a tax payment on behalf of its partners. The business pays an elective tax of 9.3% of qualified net income to the Franchise Tax Board.

Individual partners then receive a credit for state taxes paid on their individual state tax return for their pro-rata share. The biggest benefit is that the PTE payment is a business deduction at the entity level, thus making this state income tax payment deductible on the federal tax return.

This workaround is only in place for taxable years beginning on or after January 1, 2021, and before January 1, 2026.

Recently, we have found that many of our clients have either adopted the PTE tax and are using it effectively…or are not even familiar with it!

So, in the video below, Ryan and I:

  • Answer the question, “What is California's Pass-Through Entity Tax?”
  • Discuss some things to consider with the PTE.
  • Offer an example of how using it can lower the overall amount of Federal taxes you pay.

As always, this is not tax advice - you should consult your tax professional to determine if this is right for you.

For more information: https://www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/index.html

Happy planning,



Boyd Wealth Management, LLC is a Registered Investment Adviser. The information in this report is solely for informational purposes. You should always reference the statement provided by your custodian for the most complete and accurate information. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Boyd Wealth Management, LLC unless a client service agreement is in place. Please contact us at your earliest convenience with any questions regarding the content of this report. Any changes to your current overall investment objectives or financial condition should be communicated to Boyd Wealth Management, LLC. Some accounts may be compared to an index for benchmarking purposes. The index results do not reflect fees and expenses and you typically cannot invest in an index.

Boyd Wealth Management, LLC provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Boyd Wealth Management, LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.

Boyd Wealth Management, LLC does not provide accounting or legal advice.