The 2026 SALT Deduction Cap: Why California S Corp Owners Still Need PTET

The federal SALT deduction cap is $40,400 for 2026, up from $10,000 in 2024. The higher cap shrinks once your household income passes $505,000, though, and at about $606,000 you're back to $10,000. For many California S Corp owners, the bigger cap does very little, and the PTET election is still how they get a full federal deduction for their state income tax.

Below is how the cap works this year, how PTET gets around it, who comes out ahead, and the dates that matter for the 2026 and 2027 elections.

How the SALT deduction cap works in 2026

SALT stands for state and local taxes. If you itemize, you can deduct state income tax (or sales tax) and property taxes, up to a cap. The 2025 federal tax law raised that cap and added a phase-down based on income. The rules are in Section 164(b) of the tax code, and the IRS Schedule A instructions walk through the calculation. For 2026:

• The cap is $40,400, or $20,200 if you're married filing separately.
• It drops by 30 cents for every dollar of modified adjusted gross income (MAGI) above $505,000, or $252,500 if you're married filing separately.
• It never drops below $10,000, or $5,000 if you're married filing separately.
• The cap and the income threshold both rise 1% a year through 2029. In 2030, the cap goes back to $10,000 for everyone.

Here's what that means for a married couple filing jointly:

• MAGI of $505,000 or less: $40,400 cap
• MAGI of $550,000: $26,900 cap
• MAGI of $600,000: $11,900 cap
• MAGI above about $606,300: $10,000 cap

With California's income tax rates, a household in that range often owes well over $10,000 in state income tax alone, before property taxes. PTET is how S Corp owners deduct the rest.

How California's PTET election gets around the cap

California's pass-through entity elective tax lets an S Corp pay state income tax on behalf of its owners. The S Corp pays 9.3% of each consenting shareholder's share of qualified net income. Each shareholder then claims a credit for that amount on their California return, so their total California tax stays about the same.

The federal benefit comes from who pays the tax. Under IRS Notice 2020-75, a state income tax paid by the S Corp is deducted by the S Corp and doesn't count against any owner's SALT cap. It simply lowers the income on your K-1. The 2025 federal tax law left that treatment in place.

California extended PTET through 2030 under SB 132, so it's available for 2026.

Who benefits from PTET in 2026

Household income above about $606,000

This is the clearest case. Your personal SALT deduction is stuck at $10,000, so most of your California income tax would go undeducted on your federal return. With PTET, 9.3% of your S Corp income comes off your K-1 as a deduction instead.

Household income between $505,000 and $606,000

In this range PTET helps twice. The S Corp's deduction lowers your K-1 income, which lowers your MAGI, which raises your personal SALT cap. You can use that extra room for property taxes and whatever state income tax is left.

Household income below $505,000

If you itemize, the full $40,400 cap may already cover your state income and property taxes. PTET can still pay off if your SALT bill is higher than the cap, or if you take the standard deduction, because the S Corp's deduction lowers your income whether you itemize or not. The benefit is usually smaller at this level, so it's worth running both ways.

A simplified example in the phase-down range

Say a married couple who itemize has $580,000 of MAGI, including $300,000 of income from their S Corp. They pay about $45,000 in California income tax and $15,000 in property tax.

Without PTET, their SALT cap is $17,900: $40,400 minus 30% of the $75,000 they earn above $505,000. They deduct $17,900 of their $60,000 in state and local taxes.

With PTET, the S Corp pays $27,900 (9.3% of $300,000) and deducts it. Their MAGI falls to $552,100, which raises their cap to $26,270. They now deduct $26,270 of the $32,100 in state and local taxes they still pay personally, on top of the $27,900 the S Corp deducted.

That's $54,170 of deductions instead of $17,900. At a 35% federal rate, the extra $36,270 is worth about $12,700, and the PTET credit keeps their California tax roughly where it was.

This is simplified. Because the PTET payment lowers the S Corp's income, it can also trim a qualified business income (QBI) deduction, and other parts of a return can shift the result. That's why it's worth running a full projection before making the election.

PTET deadlines for 2026 and 2027

• June 15, 2026: the first 2026 payment was due, equal to the greater of $1,000 or half of the elective tax paid for 2025. If it was missed or short, you can still elect for 2026, but each owner's credit is reduced by 12.5% of their share of the shortfall.
• December 31, 2026: last day to make a payment that counts on the S Corp's 2026 federal return. The federal deduction generally follows the year the S Corp pays.
• March 15, 2027: the rest of the 2026 tax is due, even if the return is extended. The election itself is made on the S Corp's timely filed 2026 return with Form FTB 3804, and it can't be added on an amended return.
• June 15, 2027: first payment for a 2027 election.

Payments go through FTB Web Pay or the Form FTB 3893 voucher and have to be designated as PTE elective tax payments. Once made, the election can't be revoked, and it binds every shareholder, although only consenting shareholders' income is taxed and credited. The FTB's PTET page has the forms.

When PTET may not be worth it

• The S Corp has a loss or very little income this year. A shareholder whose share comes out negative isn't included and gets no credit.
• Your income is well under $505,000, you itemize, and your state and property taxes already fit under the $40,400 cap.
• Some shareholders won't consent. The election still binds them, and paying tax for only some owners can complicate how distributions are evened out.

If your income is over $1 million, PTET usually still makes sense. Just know the credit can't offset California's 1% behavioral health services tax on income above $1 million, so your estimated payments need to cover that separately.

Frequently asked questions

What is the SALT deduction limit for 2026?

$40,400, or $20,200 if married filing separately. It's reduced by 30% of MAGI above $505,000 ($252,500 if married filing separately), but never below $10,000 ($5,000 if married filing separately).

Is the SALT cap going back to $10,000?

Yes. It rises 1% a year through 2029, then returns to $10,000 starting in 2030.

Does the higher SALT cap make PTET unnecessary?

Not for most profitable S Corp owners. Above about $606,000 of income, the cap is still $10,000, and the S Corp's PTET deduction lowers your income even if you don't itemize.

Has California extended PTET?

Yes. SB 132 extended it to tax years 2026 through 2030. Starting with 2026, missing the June 15 payment reduces the credit instead of disqualifying the election.

Deciding on PTET for 2026

Whether PTET pays off depends on your income, your property taxes and who owns the company. API Accounting, Tax & Advisory can run these numbers for you as part of our year-round tax planning. If you'd like us to look at your 2026 election, reach out before year-end, while a December payment is still an option.

For the rest of the year-end list, see our California S Corp year-end tax planning guide.

This article is general information based on federal and California tax rules as of November 2026. It isn't tax advice for your situation, so talk with a licensed professional before acting on it.