PTET 2026–2030: SB 132 Rules, Prepayment Mechanics, and the 12.5% Haircut Nobody Wants

California’s Pass-Through Entity Elective Tax (PTET) remains one of the cleanest ways for many S-corp and partnership owners to improve federal deductibility of state taxes. But starting with tax years beginning on/after Jan 1, 2026, SB 132 effectively reboots the program through 2030—and adds a new trap: you can still elect even if you miss the June 15 prepayment, but your owners’ credit can get haircut by 12.5%.

If you want PTET to work the way it’s supposed to, you need process, not hope.

1) What SB 132 does (the headline)

SB 132 creates a new PTET election and a new owner-level credit for taxable years beginning on/after Jan 1, 2026 and before Jan 1, 2031 (i.e., 2026–2030 for calendar-year entities).

This new regime is intended to mirror the prior PTET structure that existed for 2021–2025, but it’s implemented as a new set of rules for 2026–2030.

2) The payment mechanics you must calendar (June 15 + original return due date)

Under SB 132, the elective tax is due in two tranches:

Payment #1: By June 15 during the taxable year

Pay the greater of:

  • 50% of the elective tax paid for the prior year, or

  • $1,000

Payment #2: By the due date of the original return (no extension)

Pay the remaining balance: elective tax minus the June 15 payment.

Operational takeaway: PTET is not “pay it when you file.” It’s a mid-year cash event plus a filing-deadline cash event.

3) The new trap: you can elect even if June 15 is missed — but the credit gets cut

Here’s the big behavioral change SB 132 introduces:

  • Even if the required June 15 payment is not made or is less than required, the entity can still make the election.

  • But the owner-level credit is reduced by 12.5% of the amount that should have been paid by June 15 but wasn’t, based on the owner’s share.

Translation: California moved from “miss June 15 and you’re out” to “miss June 15 and you’re still in—just with a permanent haircut.”

Quick example (plain English)

If the entity should have paid $100,000 by June 15 and only paid $60,000, the shortfall is $40,000. The owners’ PTET credit attributable to that unpaid $40,000 gets reduced by 12.5% (i.e., $5,000 of credit value evaporates).

That’s avoidable. You’re basically paying a penalty through the credit mechanism.

4) The SALT “trigger risk”: this PTET regime can turn off if federal rules change

SB 132 includes an inoperative/repeal mechanism tied to the federal SALT itemized deduction limitation:

  • The new PTET regime is structured to be operative only while the federal SALT limitation is in place (the bill analysis frames it as operative only if the federal limitation is extended).

  • If the federal SALT limitation is repealed before Dec 1, 2031, the California PTET provision becomes inoperative for taxable years beginning on or after the January 1 following the repeal, and is repealed on Dec 1 of that year.

Practical impact: PTET planning is still worth doing, but don’t treat it as “permanent law.” Build flexibility into forecasts and owner estimates.

5) A planning nugget that matters for projections: PTET credit and the $5M credit limitation

California has a separate concept that limits the use of business credits (commonly discussed as a $5M cap in certain years). The PTET credit gets special treatment:

  • FTB’s SB 132 bill analysis states the PTE credit “would not be subject to the $5 million credit limitation” for taxable years beginning on/after Jan 1, 2024 and before Jan 1, 2027.

  • FTB’s Form 3804-CR instructions also explicitly state that for taxable years beginning on/after Jan 1, 2024 and before Jan 1, 2027, the $5,000,000 limitation on business credits “is not applicable” to the PTET credit.

Why owners care: when people are modeling 2026 outcomes, they often worry “will I even be able to use the credit?” This carve-out can improve the reliability of PTET benefits in that window.

6) Implementation checklist: what to do if you want PTET to actually deliver

If you advise or run a pass-through in CA, treat PTET like a recurring compliance workflow:

  1. Decide early whether you’re electing for the year (don’t wait until return prep).

  2. Build a June 15 control: calendar + approval + funding + confirmation receipt.

  3. Pre-calc the June 15 minimum: 50% of last year’s elective tax or $1,000, whichever is greater.

  4. Add a second control for the original return due date (no extension) to pay the balance.

  5. If June 15 is missed/short, assume you’ll take a 12.5% credit haircut on the unpaid portion and communicate that to owners immediately.