The 2026 SALT Cap Is $40,400: When PTET Still Saves Tax

The One Big Beautiful Bill Act (OBBBA) raised the federal cap on state and local tax (SALT) deductions from $10,000 to $40,000 for 2025, with annual increases. For 2026 the cap is $40,400. That raised a fair question for California owners of partnerships and S corporations: is the pass-through entity elective tax (PTET) still worth it? For many owners the answer is still yes, and for high earners it may matter more than before. Here is how the two rules interact.

The 2026 SALT Cap and Its Phase-Down

The IRS confirms that for 2026 the overall limit on the deduction for state and local income, sales, and property taxes is $40,400 ($20,200 if married filing separately). The limit is reduced when modified adjusted gross income (MAGI) exceeds $505,000 ($252,500 married filing separately), but not below $10,000 ($5,000 married filing separately). Under Internal Revenue Code Section 164(b)(7), the reduction equals 30% of MAGI above the threshold.

The threshold is the same $505,000 for single and joint filers. That means the phase-down works like this:

• MAGI of $505,000 or less: cap of $40,400.
• MAGI of $550,000: $45,000 over the threshold, times 30%, is $13,500, leaving a cap of $26,900.
• MAGI of about $606,334 or more: the cap is back at the $10,000 floor.

Many California business owners with a strong year are above $606,334 of MAGI. For them, the higher cap provides no benefit at all, and the SALT deduction is effectively still $10,000.

How California PTET Works

Under the Franchise Tax Board's PTET rules, a qualifying partnership or S corporation may elect each year to pay a 9.3% tax on its qualified net income for taxable years beginning on or after January 1, 2021 and before January 1, 2031. Qualified net income is the sum of each consenting owner's share of income and guaranteed payments that are subject to California income tax. Each consenting owner then receives a nonrefundable California credit for the tax paid on their share, with a five-year carryover for unused credit.

On the federal side, IRS Notice 2020-75 allows the entity to deduct state income taxes it pays on its own income. The deduction reduces the owners' federal share of business income, and it is not subject to the individual SALT cap. For California purposes, the FTB adds the PTET deduction back in computing the entity's California net income.

When PTET Still Saves Tax

Owners above the phase-down. If your MAGI pushes your cap to $10,000, nearly every dollar of California income tax you pay individually is nondeductible federally. Paying it through PTET converts it into a business deduction.

Owners near the threshold. Because the entity-level deduction reduces your share of business income, it also lowers your MAGI. That can keep you closer to, or under, $505,000, which preserves more of the $40,400 individual cap for property taxes.

Owners with large property tax bills. Even below the threshold, California income tax plus property tax on a Los Angeles home can exceed $40,400. PTET moves the income tax portion off the individual return, leaving the individual cap for property tax.

When it helps less. If your total state and local taxes fit comfortably under the cap and your MAGI is well below $505,000, the federal benefit of PTET may be small. Owners with California credit carryovers, nonresident owners, and entities with owners who decline to consent also need a closer look before electing.

2026 Timing Rules: June 15 and March 15

For 2026 through 2030, the election is made on a timely filed original return and cannot be made on an amended return. Payments follow two dates:

• June 15 of the election year: the greater of $1,000 or 50% of the prior year's PTET.
• The original due date of the return, without extensions: the remaining balance. For calendar-year partnerships, LLCs, and S corporations, that is March 15, 2027 for the 2026 tax year.

Before 2026, missing the June 15 payment meant losing the election. For 2026 through 2030, the FTB explains that an entity that missed the June 15 payment or paid less than required may still make the election. However, each consenting owner must reduce their PTET credit by 12.5% of their share of the unpaid amount that was due on June 15. For example, if the required June 15, 2026 payment was $20,000 and nothing was paid, the owners' combined credit is reduced by $2,500.

Payments must be made through FTB Web Pay or with the FTB 3893 voucher, and cannot be combined with the entity's other tax payments.

A Year-End Decision

For federal purposes, the entity deducts PTET in the year it pays it. A payment made by December 31, 2026 can therefore produce a 2026 federal deduction, while a payment made with the return in March 2027 generally falls in 2027. The right answer depends on your income this year compared to next, so model both before year-end.

We have written before about the mechanics of the PTET election and SALT planning under the OBBBA. This Briefing updates both for the 2026 figures and the new June 15 relief. For other year-end items, see our 2026 year-end checklist.

Key Takeaways

• The 2026 SALT cap is $40,400, reduced by 30% of MAGI over $505,000, with a $10,000 floor.
• California PTET is 9.3% of qualified net income and is available through taxable years beginning before January 1, 2031.
• For 2026 through 2030, a missed or short June 15 payment no longer kills the election, but it reduces the owners' credit by 12.5% of the unpaid amount.
• The 2026 balance is due by the original return due date, March 15, 2027 for calendar-year entities.

If you want to know whether a 2026 PTET election and a December payment make sense for your business, schedule a consultation with SMB CPA Group. You can also contact us, learn about our custom scope of work, or review our pricing.

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