Unlocking Tax Savings: The Benefits of Making an S-Corporation Election in California—With a Focus on the Pass-Through Entity Tax (PTET)

Introduction: S-Corporation + PTET = Strategic Tax Savings in California

For California business owners, effective tax planning can dramatically increase retained earnings. Electing S-Corporation status and leveraging California’s Pass-Through Entity Tax (PTET) are two powerful tools that reduce federal taxable income and offer a workaround to the federal SALT deduction cap.

In this article, we'll break down:

  • What an S-Corporation is

  • The top S-Corp tax benefits in California

  • How the PTET election creates federal tax deductions

  • Why this strategy is especially valuable in high-tax states like California

What Is an S-Corporation? (And Why It Matters in California)

An S-Corporation, or S-Corp, is a tax election that allows qualifying LLCs and corporations to pass income, losses, deductions, and credits directly to shareholders. These earnings are then taxed at individual income tax rates—eliminating double taxation at the corporate level.

Key S-Corp Advantages in California:

  • Pass-through taxation

  • Payroll tax savings on distributions

  • Simplified accounting compared to C-Corps

  • Eligibility for PTET, which can significantly reduce net federal tax exposure

California’s Pass-Through Entity Tax (PTET): A SALT Deduction Workaround

The California PTET, introduced by Assembly Bill 150 (AB 150) and enhanced by Senate Bill 113 (SB 113), allows eligible pass-through entities (PTEs) like S-Corps and partnerships to pay tax at the entity level—creating a federal deduction and bypassing the $10,000 SALT deduction limit under the 2017 Tax Cuts and Jobs Act.

How PTET Works:

  • Electing entities pay a 9.3% tax on qualified net income.

  • The business deducts that amount on its federal tax return.

  • Shareholders receive a California tax credit for their share of the PTET paid.

This mechanism turns state tax payments into federally deductible business expenses.

Example: S-Corp with PTET Election Saves Big

Assume a California S-Corp earns $1 million in distributable net income:

  • PTET Paid: $93,000 (9.3%)

  • This amount is deductible federally by the S-Corp.

  • Shareholders each get a dollar-for-dollar California income tax credit based on their ownership share.

  • Net result: Lower federal taxable income and preserved California credits.

Why S-Corporations Are the Ideal PTET Vehicle

While both partnerships and S-Corps can elect PTET, S-Corps are often the better choice for several reasons:

  • Streamlined ownership and compensation structures

  • Simplified tax reporting

  • Reduced exposure to self-employment tax

  • More straightforward cash flow forecasting for the June 15 PTET prepayment deadline

Who Qualifies for the PTET Election in California?

PTET Eligibility Checklist:

  • Must be a qualified pass-through entity (S-Corp or partnership)

  • All shareholders must be eligible individuals, trusts, or estates

  • Election must be made annually and irrevocably for that year

  • First prepayment is due June 15 of the current tax year

Key Tax Deadlines and Filing Tips for California PTET

To fully benefit, timing and compliance are essential:

  • June 15: First PTET installment (50% of prior-year PTET or current-year estimate)

  • March 15 (following year): PTET election and final payment via Form 3893

  • Use Schedule K-1 to report PTET credits to shareholders

  • Work closely with your CPA or tax attorney to avoid eligibility pitfalls

Final Thoughts: Should You Elect S-Corp Status and File for PTET?

If your California business is profitable and has eligible owners, the combination of S-Corporation status and the Pass-Through Entity Tax election could unlock thousands—if not tens of thousands—in annual tax savings.

It’s one of the most effective tools available to:

  • Lower your federal taxable income

  • Preserve California income tax credits

  • Avoid the impact of the SALT deduction cap

Ready to Elect S-Corp Status in California?

Consult your tax and legal advisors to determine if this strategy fits your business goals. Making the right election today can dramatically reduce your future tax burden.

Disclaimer: This blog post is for informational purposes only and does not constitute legal or tax advice. Always consult with a qualified tax professional regarding your unique business circumstances.