Dear [CLIENT NAME]:

California’s passthrough entity elective tax statute allows qualified S corporations, partnerships, or LLCs (other than SMLLCs) to pay tax on their individual, trust, estate, and certain single member LLC owners’ share of the entity’s qualified net income at the entity level. It also allows these owners to claim a credit for the tax paid on their California personal income tax return.

Having the entity pay the tax may reduce your federal taxable income by the amount of tax paid, and you may also qualify to claim a 100% California credit equal to the amount of the entity tax paid on your share of the entity’s income.

A qualified passthrough entity and its owners must make an annual election each year to pay California’s passthrough entity tax and receive the tax benefits that the elective tax provides. To preserve the maximum credit, for the 2026 taxable year, the passthrough entity must make a prepayment of the tax by June 15, 2026. New starting this year, an entity that fails to make the required prepayment by June 15 can still make the passthrough entity elective tax election, but it comes at a cost: The credit is reduced by 12.5% of the June 15 payment shortfall. For tax years before 2026, the entity is prohibited from making the election altogether if it missed or underpaid its June 15 prepayment.

For a quick refresher:

The amount of the June 15 prepayment is the greater of:

• 50% of the passthrough entity elective tax paid for the prior tax year; or
• $1,000 (if you did not make the election for 2025 and will not do so on an extended return, then only $1,000 must be paid by June 15, 2026, if you want to make the election for 2026).

The 50% figure is nonnegotiable, even if we know the entity’s income for 2026 will be less than it was for 2025. There is also no reasonable cause exception for not meeting the 50% threshold. This is true even if your 2025 entity tax return is still on extension or your 2026 income will be significantly lower.

For returns still on extension, we are advising clients to add a “cushion” to what we estimated the 2025 tax liability to be so you do not face a credit reduction for 2025.

Entities make the payment by:

• Check, using a 2026 Form 3893, Pass-Through Entity Elective Tax Payment Voucher,  which we can prepare for you, and have you mail certified mail for proof of mailing; or
• Using the FTB’s Web Pay feature at: https://webapp.ftb.ca.gov/webpay/login/belogin?Submit=Use+Web+Pay+business; or
• Electronic fund withdrawal when we e-file your return.

With the June 15 prepayment deadline approaching, it is critical we discuss whether making the election for 2026 is the right move for you and your passthrough entity this year. Please contact our office immediately so we can set up an appointment to evaluate your situation.

Sincerely,

Your tax professional