On June 27, 2025, California Gov. Gavin Newsom signed revenue trailer legislation as part of the 2025-26 budget package that extends the elective pass-through entity (PTE) tax for five years.1 The legislation also requires financial institutions to use single sales factor apportionment beginning with the 2025 tax year and substantially increases the amount the state has available to fund its expansive film and television tax credit program.
Extension of elective PTE tax
The legislation extends the elective PTE tax through the 2030 tax year. Under existing law, for tax years beginning in 2021 through 2025,2 a PTE that is a “qualified entity” may make an annual election to pay tax at the entity level on “qualified net income” at a rate of 9.3%.3 When this election is made, a PTE owner that is a “qualified taxpayer” is allowed a tax credit against California income tax liability based on 9.3% of the owner’s income that was included in the qualified net income of the electing PTE by consent.4 To the extent unused by the qualified taxpayer, the credit for the PTE tax can be carried forward for up to five years.5 By June 15 of the tax year of the election, a qualified entity is required to pay an amount of (i) at least 50% of the elective PTE tax paid the prior tax year or (ii) $1,000, whichever is greater.6 The remaining amount must be paid by the due date of the original return.7
As amended, a qualified taxpayer that is a partner, shareholder, or member of an electing qualified entity that makes its election for the tax year beginning in 2025 and files its return on a fiscal year basis is allowed the credit for its tax year beginning in 2026.8
New statutes are added to provide the elective PTE tax and credit for tax years beginning in 2026 through 2030.9 The new provisions are somewhat similar to the existing provisions, but in an important shift, a qualified entity may make the election even if it fails to make the required payment or the payment is less than the amount required.10 However, for a taxpayer who is a partner, shareholder, or member of an electing qualified entity that does not make the required payment by June 15 or makes a payment less than the required amount, the credit is reduced by 12.5% of the qualified taxpayer’s pro rata share of the amount due but not paid.11 Also, similar to the provision added for the 2025 tax year, a qualified taxpayer that is a partner, shareholder, or member of an electing qualified entity that makes its election for the tax year beginning in 2030 and files its return on a fiscal year basis is allowed the credit for its tax year beginning in 2031.12
Financial institution apportionment
For tax years beginning on Jan. 1, 2025, and subsequent tax years, financial institutions are required to use the same single sales factor apportionment methodology used by most corporate taxpayers in California.13 Prior to amendment, taxpayers that derived more than 50% of their gross business receipts from conducting a qualified business activity, such as a banking or financial business activity, or a savings and loan activity were required to use an equally weighted three-factor apportionment formula consisting of property, payroll, and sales factors.14
Film and television credits
The aggregate annual amount of corporate and individual income tax credits that may be taken under the California Film Tax Credit Program 4.0 is increased from $330 million to $750 million for each of the fiscal years 2025-26 through 2029-30.15
Commentary
California’s extension of the elective PTE tax and credit to tax years beginning in 2026 through 2030 is helpful to PTEs and their individual owners, as this extension has been unlocked by the extension of the federal SALT deduction cap by the One Big Beautiful Bill Act (OBBBA).16 Under existing law, the California elective PTE tax only applied through the 2025 tax year because the federal SALT deduction cap was scheduled to sunset at the end of 2025. Therefore, until recently, the future of the cap and the PTE tax regimes that were created in order to work around the cap was unclear.
The extension of the elective PTE tax for five years provides certainty for qualified entities in determining whether they want to make the election. The new PTE tax statutes for the 2026 through 2030 tax years generally are consistent with the existing California statutes for the prior tax years. As such, many of the distinctive features of the California PTE tax regime, in contrast with regimes enacted by other states, still apply. For example, unlike a traditional quarterly estimated tax payment, California has required a significant upfront payment to preserve the ability to make the PTE tax election. This legislation modifies that policy by ensuring that qualified entities no longer are required to make a payment by June 15, but the credit amount is reduced if they do not make the payment or pay less than the statutory amount. Due to the recent extension of the SALT cap, other states with elective PTE taxes scheduled for repeal at the end of 2025 are likely to enact legislation to extend their PTE tax regimes.
The change in apportionment methodology for financial institutions could significantly alter the amount of income that they apportion to California because the payroll and property factors are no longer used. The shift to a single sales factor is intended to help financial institutions with significant in-state presence that have nationwide customer markets. Because this change is effective beginning with the 2025 tax year, financial institutions should consider the change to single sales factor apportionment immediately. By making this statutory amendment, the apportionment methodology for financial institutions is now consistent with the apportionment method used by most businesses in California.
California has been enacting legislation to improve the film and television production credits to encourage an increase in these activities in the state. By more than doubling the aggregate amount of funds available for these credits for the next few fiscal years, significantly larger credits should be available for film and television production. Taxpayers in this industry should review and consider claiming these credits, noting the significant rules that must be followed by production companies in order to obtain the maximum value of these credits.
There is a strong probability that California will enact additional major tax legislation this year. Specifically, the California legislature currently is considering a bill that would advance the state’s general Internal Revenue Code conformity date from Jan. 1, 2015 to Jan. 1, 2025.17 While a ten-year advancement in the conformity date conceivably would make it far easier for taxpayers from a tax compliance perspective, expectations may need to be tempered on that front, as California may be particularly selective in the federal provisions it ultimately chooses to follow.
1 Ch. 17 (S.B. 132), Laws 2025. This SALT Alert focuses on the most significant income tax provisions contained in this legislation.
2 The $10,000 SALT deduction cap included in the Tax Cuts and Jobs Act (TCJA) of 2017 (P.L. 115-97) was originally scheduled to sunset at the end of 2025, which is why the existing California elective PTE tax only applied to tax years beginning in 2021 through 2025.
3 CAL. REV. & TAX. CODE § 19900(a)(1).
4 CAL. REV. & TAX. CODE § 17052.10(b)(2). A “qualified taxpayer” is defined as a taxpayer, excluding partnerships, that is a partner, shareholder, or member of an electing qualified entity. CAL. REV. & TAX. CODE § 17052.10(b)(3).
5 CAL. REV. & TAX. CODE § 17052.10(c).
6 CAL. REV. & TAX. CODE § 19904(a)(2)(A).
7 CAL. REV. & TAX. CODE § 19904(a)(2)(B).
8 CAL. REV. & TAX. CODE § 17052.10(d).
9 CAL. REV. & TAX. CODE §§ 17052.11; 19910–19916. The new provisions only become operative if the federal SALT deduction cap for the 2018 through the 2025 tax years is extended. CAL. REV. & TAX. CODE §§ 17052.11(h); 19916(a). On July 4, 2025, the One Big Beautiful Bill Act (P.L. 119-21) was enacted and extends the SALT deduction cap.
10 CAL. REV. & TAX. CODE § 19914(b).
11 CAL. REV. & TAX. CODE § 17052.11(d).
12 CAL. REV. & TAX. CODE § 17052.11(b)(2)(B).
13 CAL. REV. & TAX. CODE §§ 25128(b), (c); 25128.7.
14 Note that the equally-weighted three-factor formula continues to apply to taxpayers that derive more than 50% of their gross business receipts from an agricultural or extractive business activity.
15 CAL. REV. & TAX. CODE § 23698.1(i). Note that on July 3, 2025, legislation was enacted that expands the types of productions eligible for the credit and increases the credit amount percentages. Ch. 27 (A.B. 1138), Laws 2025.
16 P.L. 119-21. Under the new federal law, the cap increases to $40,000 in 2025, increases 1% annually through 2029, and then reverts to $10,000. However, the cap is reduced if certain income levels are exceeded. IRC § 64(b)(6).
17 S.B. 711, as passed by the California Senate on May 28, 2025. This legislation currently is being considered by the California Assembly. Because this legislation as currently proposed would adopt the IRC as in effect on Jan. 1, 2025, it would not adopt provisions of the OBBBA that was enacted on July 4, 2025.
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