California PTE Tax for Law Firms | Kathryn Meyer Law PC

It often makes sense for an S corporation or partnership whose owners pay California income tax and are limited by the federal cap on deducting state taxes, which is $40,400 for 2026. The firm pays a 9.3% tax on the consenting owners' shares of income, and each consenting owner claims a California credit for it. The price is an irrevocable annual election and a June 15 payment that comes due before the year's income is known.

The firm's post Tax-Smart Lawyering calls this the PTET workaround; this page sets out the current California rules behind it. It is part of Kathryn Meyer's work on tax planning for law firms.

How the elective tax works, step by step

Confirm the firm qualifies. The Franchise Tax Board says a qualifying pass-through entity is one taxed as a partnership or S corporation. Publicly traded partnerships and entities permitted or required to be in a combined reporting group do not qualify, and neither does a law corporation taxed as a C corporation.
Identify the qualified taxpayers. These are partners or shareholders who are individuals, fiduciaries, estates or trusts subject to California personal income tax, or a single-member LLC disregarded for tax and owned by one of them. A partner that is itself a corporation or partnership is not a qualified taxpayer.
Collect consents. Each qualified taxpayer must consent to include all of their pro rata or distributive share and guaranteed payments in the firm's qualified net income.
Make the first payment by June 15 of the election year. It is the greater of $1,000 or 50% of the elective tax paid for the prior year, made through Web Pay or with the FTB 3893 voucher, and it cannot be combined with the firm's other tax payments.
Pay the rest by the return's original due date. The second payment is due on or before the original due date of the firm's return, without regard to extensions.
Elect on the return. The election is made on a timely filed original return by attaching FTB 3804 and reporting the elective tax on the designated line. It cannot be made on an amended return, and once made it is irrevocable for that year and binds all owners, consenting or not.
Owners claim the credit. Each consenting owner claims a nonrefundable credit on FTB 3804-CR with their personal return; unused credit carries over for up to five years.

Which years are covered and what the June 15 payment means

The FTB page says the elective tax is available for taxable years beginning on or after January 1, 2021 and before January 1, 2031. The rules on the June 15 payment changed for 2026:

Taxable years	How to elect	June 15 payment
2021	FTB 3804 with a timely filed original return	None; tax paid by the original due date of the return
2022 to 2025	FTB 3804 with a timely filed original return	Required initial payment by June 15 of the election year
2026 to 2030	FTB 3804 with a timely filed original return	Still due by June 15, but a missed or short payment no longer blocks the election; each consenting owner's credit is cut by 12.5% of their pro rata share of the unpaid June 15 amount

For 2022 through 2030, payment 1 is the greater of $1,000 or 50% of the prior year's elective tax, and payment 2 is the remaining amount. When a due date falls on a weekend or legal holiday, the FTB treats a payment on the next business day as timely. Failing to make the required payments can bring penalties and interest.

How the tax is figured and credited

The elective tax is 9.3% of the firm's qualified net income, which the FTB defines as the sum of each qualified taxpayer's pro rata or distributive share and guaranteed payments that are subject to California personal income tax. Salary that an S corporation pays its owners is wages, not a pro rata share, and the FTB's definition does not list wages; the trade-off between salary and distributions is covered in how much salary a law firm owner should take from an S corporation.

Two California details follow. If the firm deducts the elective tax for federal purposes, the amount deducted is added back in computing the firm's California net income. And for 2022 through 2030, an owner who also claims California's credit for taxes paid to other states must increase "net tax payable" by the elective tax credit used, before applying that other-state credit.

The elective tax is in addition to the firm's own California taxes. An S corporation still owes its 1.5% tax and the $800 minimum under R&TC 23802, as explained in which entity a California law firm can use and how it is taxed.

Why it matters federally: the 2026 deduction cap

For 2026, the IRS says the overall limit on the individual 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 exceeds $505,000 ($252,500 if married filing separately), but not below $10,000 ($5,000 if married filing separately).

In Notice 2020-75, the IRS announced that income taxes imposed on and paid by a partnership or S corporation are deductible by the entity in computing its non-separately stated income for the taxable year in which the payment is made, and that these payments are "not taken into account in applying the SALT deduction limitation" to the owners. The notice was written when the cap was $10,000; it remains posted on irs.gov, and no IRS page read for this guide withdraws it. Because the payment reduces the income that passes through to the owners, it can also affect other calculations, such as the 20% qualified business income deduction for lawyers.

What changes the answer

The owners' federal position. The value depends on how much of each owner's state tax the federal cap would otherwise disallow; the IRS's 2026 limit and its income-based reduction set that number.
Who the owners are. Only qualified taxpayers subject to California personal income tax can consent; a corporate or partnership owner cannot (FTB page).
Whether every owner consents. The election binds all owners, but only consenting qualified taxpayers' shares count toward qualified net income and the credit (FTB page).
Cash flow. The June 15 payment comes early in the year; a firm with contingency fees or uneven income may find it hard to size, and the 2026 to 2030 credit reduction prices a shortfall at 12.5% of the unpaid amount.
The owner's California tax. The credit is nonrefundable, so an owner whose California tax is lower than the credit carries the excess forward for up to five years (FTB page).
The firm's entity and elections. A law corporation that never made a valid S election is a C corporation and cannot use the elective tax; see whether a firm can still elect S status after missing the deadline.
Estimated tax planning. Moving tax to the entity changes what each owner pays personally during the year; see how a law firm owner should handle quarterly estimated taxes.

For example: one owner, one S corporation

For example, a California lawyer owns all of a law corporation taxed as an S corporation. For 2026, her pro rata share of the firm's income is expected to be $300,000, so the elective tax would be $27,900 (9.3% of $300,000). The firm paid $24,000 of elective tax for 2025, so its June 15, 2026 payment is the greater of $1,000 or 50% of $24,000: $12,000. The remaining $15,900 is due by the original due date of the 2026 Form 100S, the 15th day of the 3rd month after the year ends, which is March 15, 2027. Under Notice 2020-75, the firm deducts each payment federally in the year it is paid, outside her $40,400 individual cap, and for California the deducted amount is added back. She then claims the $27,900 credit on FTB 3804-CR. If the firm had paid only $8,000 by June 15, 2026, the election would still be allowed for 2026, but her credit would drop by $500 (12.5% of the $4,000 shortfall). This is a hypothetical, not a real case.

Common mistakes with the pass-through entity elective tax

Treating June 15 as optional. For 2022 through 2025 the payment was a condition of the election; for 2026 through 2030 a shortfall still costs 12.5% of the unpaid amount in lost credit.
Paying the elective tax with the firm's other California payments. The FTB requires Web Pay or the FTB 3893 voucher and says the payment cannot be combined with other tax payments.
Trying to elect on an amended return. The FTB says the election must be made on a timely filed original return.
Skipping written consents. An owner who does not consent is not a qualified taxpayer for that year and gets no credit.
Forgetting the California add-back. The federal deduction is added back in computing the firm's California net income.
Assuming the elective tax replaces the firm's own tax. The S corporation's 1.5% tax and $800 minimum still apply.

What to do this week

Confirm whether the firm made a June 15, 2026 payment, and how much.
Estimate 2026 qualified net income for each consenting owner and the 9.3% tax on it.
Get signed consents from each owner who will participate.
Calendar payment 2 for the original due date of the 2026 return and the June 15, 2027 payment for the next year.
Ask your preparer to show the federal deduction, the California add-back and each owner's FTB 3804-CR credit side by side.
Review the decision once a year; the Quarterly Tax Health Checkup builds that review into the firm's calendar.

Frequently asked questions

Can a law corporation taxed as a C corporation make the election?

No. The FTB says a qualifying entity is one taxed as a partnership or S corporation. A C corporation pays California's corporate franchise tax on its own income instead.

Does every owner have to consent?

No. The election binds all owners, but only owners who consent are qualified taxpayers whose shares are included in qualified net income and who receive the credit.

We missed the June 15, 2026 payment. Is the 2026 election lost?

No. For 2026 through 2030, the FTB says the firm may still elect, but each consenting owner's credit is reduced by 12.5% of their pro rata share of the unpaid June 15 amount.

Can the firm change its mind after electing?

Not for that year. The FTB says the election is irrevocable for the year once made, though the firm decides again each year.

How long is the elective tax available?

The FTB page covers taxable years beginning before January 1, 2031, so 2030 is the last year under current law.

Is the credit refundable if an owner's California tax is small?

No. The credit is nonrefundable, and unused credit can be carried over for up to five years.

What if the firm's California standing is in question?

Fix that first. A suspended corporation loses its powers until it is revived; see what happens if California suspends your law corporation.

Deciding on the election each year

The election is a yearly decision that turns on the owners' income, their federal cap and the firm's cash. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and helps law firms weigh choices like this one alongside entity, salary and estimated tax planning, including through the Annual or Quarterly Tax Health Checkup. To review your firm's position, contact the firm or call (571) 560-8674.

Sources

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