Bypassing the SALT Cap: How AB 150 Saves Bay Area Business Owners Millions
Ever since the Tax Cuts and Jobs Act capped State and Local Tax (SALT) deductions at $10,000 on federal personal returns, high-earning California small business owners have been forced to pay federal income tax on money already handed over to the Franchise Tax Board (FTB). California Assembly Bill 150 (AB 150) levels the playing field by creating an elective 9.3% entity-level state tax for S-Corporations, Partnerships, and LLCs.
By converting non-deductible personal state income taxes into an above-the-line federal business expense, the AB 150 PTE tax election drastically lowers your net federal taxable income. At Moontree Tax Service, we integrate AB 150 elections directly with our small business tax planning to ensure owners in Campbell, Cupertino, and Los Gatos capture every dollar of allowable deduction without triggering FTB penalties.
The Math: How an S-Corp Owner Saves $17,200+
- The Scenario: An S-Corp owner in San Jose earns $500,000 in net qualified business income.
- Without AB 150: The owner pays ~$46,500 in CA personal state tax. Due to the $10k SALT cap, $36,500 of that tax provides ZERO federal tax benefit.
- With AB 150 PTE Election: The S-Corp pays a 9.3% elective tax ($46,500) directly from the corporate account.
- The Federal Savings: The $46,500 payment reduces federal taxable business income on Form 1120-S. At the 37% federal bracket, this creates an instant $17,205 in federal tax savings—while receiving a dollar-for-dollar credit on their California personal return!
The Strict FTB Rules: Miss a Deadline, Lose the Election
The California Franchise Tax Board is unforgiving when it comes to AB 150 compliance. Making a mistake on your payment vouchers invalidates the election for the entire tax year:
To qualify for the election, your business MUST pay the greater of $1,000 or 50% of the prior year’s PTE tax liability by June 15th (using FTB Form 3893). If you miss this prepayment by even one day, you are legally barred from making the PTE election for that tax year.
To claim the federal tax deduction in the current calendar year, the remaining balance should be paid before December 31st. Any final tax settlement must be remitted by the March 15 corporate filing deadline.
Core AB 150 & Entity Tax Advisory Services
Comprehensive compliance and calculation support for California business owners.
June 15 FTB 3893 Calculations
We model your mid-year net income and execute required June 15 FTB 3893 vouchers to guarantee your business remains fully eligible for the SALT workaround.
Form 3804 Tax Return Preparation
We attach FTB Form 3804 (Pass-Through Entity Elective Tax) to your annual Form 1120-S or 1065 return, allocating precise elective tax credits to each shareholder Schedule K-1.
Officer Reasonable Salary Balancing
PTE tax only applies to net business profit, not W-2 wages. We balance your S-Corp reasonable compensation against qualified net income to maximize both FICA tax savings and PTE tax credits.
Personal 1040 Credit Integration
We flow your entity-level credits directly into Form 3804-CR on your California personal return, ensuring you get full tax credit offsets against your state income tax liability during individual tax preparation.
Integrating S-Corp Tax Savings With Asset Growth
Bypassing the SALT cap frees up substantial capital that business owners can immediately reinvest into real estate or high-yield investments.
If you are deploying business distributions into commercial or residential real estate, we pair your corporate filings with our 1031 Exchange Tax Advisory. Balancing consulting revenue alongside W-2 stock options? We coordinate your business returns with our specialized RSU cost basis adjustments and ISO AMT planning strategies.
Frequently Asked Questions About California AB 150
Can Single-Member LLCs participate in the AB 150 PTE election?
No. Disregarded single-member LLCs filing on Schedule C are not eligible. However, a single-member LLC can elect to be taxed as an S-Corporation (Form 2553), which immediately unlocks eligibility for the AB 150 PTE tax workaround.
What happens if my PTE credit exceeds my California state tax bill?
If your pass-through entity tax credit exceeds your personal California state tax liability in a given year, the unused credit is non-refundable, but it carries forward for up to 5 years to offset future California state income taxes.
Is the AB 150 PTE election permanent once made?
No. The election is made on an annual basis on a timely filed original tax return (Form 3804). You can choose whether or not to participate each tax year depending on your profit levels and overall tax strategy.
Stop Losing Cash to the Federal SALT Cap
Schedule a 1-on-1 strategy session with Brandy Phuong, CPA to review your S-Corp or LLC structure, model your PTE tax savings, and secure your June 15 prepayment deadline.
Schedule Your AB 150 Consultation →