OBBBA 2025: What California S-Corps Actually Need to Know

The One Big Beautiful Bill Act — formally the Working Families Tax Cuts, signed into law July 4, 2025 as Public Law 119-21 — reshaped a lot of the federal tax code that S-corp owners care about. California, mostly, did not come along for the ride. That gap between federal and state law is where the real 2025 planning work is — and where a lot of California S-corp owners are about to file returns that leave money on the table.

Here's what actually changes, what doesn't, and what we're doing about it.

The PTE election still matters — and California just extended it through 2030

California's Pass-Through Entity Elective Tax (Rev. & Tax. Code § 19900 et seq.) was built as a SALT-cap workaround: the S-corp pays a 9.3% tax on qualified net income at the entity level, deducts it federally under Notice 2020-75, and passes a credit back to the owners on their California return. For an owner in the top federal bracket, the federal benefit is real — roughly $370 saved for every $10,000 of PTE tax paid.

OBBBA (formally the Working Families Tax Cuts, Public Law 119-21, signed July 4, 2025) did not repeal the SALT cap in a way that eliminates the PTE benefit. It raised the cap for some taxpayers and added phase-outs for high earners, but for most of our CA S-corp clients the PTE election still delivers meaningful savings.

And the CA election has been extended. California previously scheduled the PTE elective tax to sunset after the 2025 tax year. That deadline has been pushed out — under current FTB guidance the election is available for taxable years beginning on or after January 1, 2021, and before January 1, 2031. That means the election continues to be a live planning tool through the end of the decade, not a one-year window.

There is also a meaningful mechanical change for 2026 through 2030. Under the old rules (2022–2025 taxable years), if the qualified entity didn't make the required initial payment — $1,000 or 50% of the prior year's PTE tax, whichever was greater — by June 15 of the election year, the election was disqualified. There was no cure. Under the new rules for 2026–2030, missing or underpaying the June 15 payment no longer kills the election. The entity can still make a valid election, but each qualified taxpayer must reduce their PTE elective tax credit by 12.5% of their pro rata share of the unpaid June 15 amount. That's a real penalty, but it's not the cliff it used to be.

Two things to get right for 2025:

1. The June 15, 2025 prepayment deadline is still hard. For the 2025 taxable year the old rules apply — a missed prepayment disqualifies the election with no cure. Starting with the 2026 taxable year the 12.5% credit reduction applies instead. If you owed PTE for 2024 and haven't confirmed your 2025 prepayment status, do it now.
2. Not every dollar of S-corp income qualifies. Guaranteed-payment-equivalent wages, non-California-source income, and certain investment income are excluded from qualified net income. Getting the qualifying base right is the difference between a clean election and an FTB notice.

What we're doing about it: every California S-corp we prepare gets a PTE election worksheet before Q4, showing the qualified base, the projected tax, the federal deduction, and the owner-level credit. Under the extended timeline, we're also rebuilding multi-year models — the election is now a decade-long planning tool, not a one-shot decision.

Reasonable compensation just got more complicated

OBBBA made the 20% QBI deduction under § 199A permanent and raised the SSTB phase-in thresholds. For a California S-corp owner, this changes the reasonable-compensation calculation in ways that matter.

The old rule of thumb was "pay yourself enough to satisfy the IRS, and let the rest flow as distribution to save payroll tax." That rule of thumb is now genuinely wrong for a nontrivial share of S-corp owners, because:

• W-2 wages you pay yourself reduce your QBI base (dollar for dollar).
• W-2 wages you pay yourself create your W-2 wage limit for the QBI deduction (50% of W-2 wages, or 25% + 2.5% of UBIA of qualified property).
• Below certain income thresholds — much higher after OBBBA — the W-2 wage limit doesn't apply at all, so wages are pure QBI drag.
• Above those thresholds, W-2 wages become necessary to unlock the deduction.

There is a payroll-tax-vs-QBI optimum for every S-corp owner and it is almost never the number the last CPA plugged in three years ago. For California S-corp owners specifically, the 1.5% CA franchise tax on S-corp net income at the entity level (§ 23802) further tilts the math, because unlike federal, California taxes S-corp income both at the entity and the owner level.

What we're doing about it: rerunning reasonable-comp analysis for every S-corp client at 2025 projection time, using their actual income, their state (California-specific for our LA clients), and their retirement contribution goals. For roughly a third of clients, the number is materially different from what they've been running.

Bonus depreciation is back to 100% federally — California still says no

OBBBA restored 100% first-year bonus depreciation for qualified property placed in service in 2025, reversing the phase-down that would have brought it to 40%. This is genuinely useful for federal purposes.

California does not conform. California has never allowed bonus depreciation under § 168(k), and OBBBA doesn't change that. For CA S-corps, you'll take the federal 100% bonus and then add it back on Schedule CA (or in the corporate 100S adjustments). California depreciation continues under regular MACRS.

The practical consequence: your federal and California tax basis in fixed assets are diverging every year, and the divergence widens. For an S-corp that buys, say, $200,000 of qualifying equipment in 2025, you'll deduct all $200,000 federally and roughly $28,000 in California. The remaining $172,000 comes back to you as California depreciation over the following years — which means you owe more California tax now, less later, and you need a fixed-asset schedule that tracks two sets of numbers correctly.

What we're doing about it: every 2025 asset addition on our California S-corp clients gets a federal-vs-California basis schedule built into the fixed-asset detail. If your preparer isn't tracking this, you're going to get California basis wrong on the eventual disposition, and it will cost more to fix than to prevent.

§ 174 R&E capitalization: partial relief, California unaffected

OBBBA rolled back the TCJA-era § 174 capitalization requirement for domestic research expenditures. Foreign R&D is still capitalized over 15 years. This helps federal, but California — again — never conformed to the § 174 capitalization rule in the first place, so for California purposes you've been deducting these expenditures all along.

The result is another federal/California book-tax divergence: what was previously "capitalize federally, deduct in California" now becomes "deduct federally, deduct in California" for domestic R&D. Cleaner going forward, but the pre-2025 capitalized balances still need to be tracked and amortized federally, and the California basis in that R&E is different.

For CA S-corps in tech, biotech, media, and entertainment — where R&E spend is common — this is worth an explicit reconciliation at 2025 year-end so we're not carrying a stale federal capitalized balance into 2026.

The 1.5% CA franchise tax on S-corp income didn't go anywhere

OBBBA did nothing to the state-level 1.5% California franchise tax on S-corp net income (or the $800 minimum). For high-earning CA S-corp owners, this is often the single largest state tax item, and it's the reason CA S-corp economics have always looked different from Texas or Nevada S-corp economics.

Two planning notes:

• Loss years. In a loss year, the $800 minimum still applies, but the 1.5% is not owed on losses. NOL carryforwards at the entity level are limited compared with federal, and California's NOL suspension rules (which were extended and modified again in 2024) apply to entity-level franchise tax.
• Estimated payments. California S-corps owe estimates on both the 1.5% franchise tax and the PTE tax (if elected). Missing either estimate creates penalties that don't get abated for reasonable cause the way federal penalties sometimes do.

What we're doing across our California S-corp client base

Three things:

1. Every California S-corp gets a 2025 projection before Q4 that runs the PTE election, reasonable comp, QBI, and fixed-asset federal/CA divergence in one integrated worksheet. The output is a one-page summary showing federal tax, CA tax, PTE benefit, and any decisions we need from the owner (usually about compensation or asset placed-in-service timing).
2. Every California S-corp gets a fixed-asset schedule review at year-end to make sure federal and CA basis are tracking correctly, especially for anyone with material 2025 purchases.
3. Every California S-corp owner with SSTB income near the phase-in thresholds gets a reasonable-comp analysis that runs the actual payroll-tax-vs-QBI trade-off, not the rule of thumb.

The uncomfortable truth about default S-corp elections

A lot of California S-corp elections were made in 2018 or 2019 based on TCJA math that no longer applies cleanly. The permanent QBI deduction, the changed SSTB thresholds, and the ongoing CA/federal divergence mean the answer that made sense five years ago might not make sense now. In our practice, roughly one in five California S-corp elections we inherit could pencil out better as a partnership or a single-member LLC.

Undoing an S-corp election is not trivial. But neither is filing under it for another five years without checking whether it's still the right structure.

If your California S-corp is on autopilot and your last full projection was pre-OBBBA, that's a conversation worth having.

David Meyer, CPA is a Partner at Laléa & Black and leads the firm's tax strategy practice for HNW individuals, closely held businesses, and cross-border filers. The firm serves California S-corp owners across Beverly Hills, Los Angeles, and the broader entertainment, real estate, and professional-services communities.