On June 27, 2025, Governor Gavin Newsom approved revenue trailer legislation included in California’s 2025-26 budget. The new law introduces several significant tax developments, including a:

• Five-year extension of the state’s elective pass-through entity (PTE) tax
• Revised apportionment method for financial institutions
• Substantial expansion of funding for California’s film and television tax credit program

Extension of the Elective Pass-Through Entity Tax (AB 150)

The legislation extends California’s elective PTE tax (established by AB 150) through the 2030 tax year. Under prior law, the election was available only for tax years beginning between 2021 and 2025. During that period, a qualifying PTE could elect to pay California income tax at the entity level on its qualified net income at a rate of 9.3%.

When a PTE makes this election, its eligible owners (partners, shareholders, or members) may claim a corresponding credit against their California personal income tax liability equal to 9.3% of their share of the entity’s qualified net income. Any unused credit may be carried forward for up to five years.

Historically, electing entities were required to make a prepayment by June 15 of the election year equal to the greater of 50% of the prior year’s elective PTE tax or $1,000, with the remaining balance due by the original return due date.

New Rules for 2026–2030

The newly enacted statutes extend the PTE tax and credit framework to tax years beginning in 2026 through 2030, with an important procedural change. A qualified entity may now make the PTE election even if it fails to submit the required June 15 payment or pays less than the mandated amount.

However, this flexibility comes at a cost. If the required payment is not made in full and on time, the credit available to each qualified owner is reduced by 12.5% of their proportional share of the unpaid amount. This adjustment softens, but does not eliminate, the consequences of missing the prepayment deadline.

Additionally, for electing entities that file on a fiscal year basis, owners may claim the PTE credit in the subsequent tax year. This applies to elections made for tax years beginning in 2025 (claimed in 2026) and for tax years beginning in 2030 (claimed in 2031).

Financial Institutions Shift to Single Sales Factor Apportionment

Beginning with tax years starting on January 1, 2025, financial institutions must calculate California apportionment using a single sales factor, aligning them with the method already applied to most corporate taxpayers in the state.

Previously, financial institutions deriving more than half of their gross receipts from qualified banking or financial activities were required to use a three-factor apportionment formula that equally weighted property, payroll, and sales. The elimination of property and payroll factors may significantly alter the amount of income apportioned to California, particularly for institutions with large in-state operations but geographically diverse customer bases.

Given the immediate effective date, financial institutions should evaluate the impact of this change as soon as possible with a Certified Public Accountant.

Expanded Film and Television Tax Credits

The budget legislation dramatically increases funding for the California Film and Television Tax Credit Program 4.0. For each fiscal year from 2025-26 through 2029-30, the total amount of corporate and personal income tax credits available under the program rises from $330 million to $750 million annually.

This expansion more than doubles the funding pool and is expected to make significantly larger credits available to eligible productions, reinforcing California’s efforts to retain and attract film and television projects.

Key Takeaways and Taxpayer Implications

California’s recent tax changes carry important implications for businesses and individual taxpayers. Below are the most impactful elements to understand:

Extended Elective PTE Tax Through 2030

• The elective PTE tax regime now applies to tax years 2026-2030, offering continued SALT cap mitigation for eligible pass-through entities.
• Qualified entities can still elect into the regime without strict prepayment timing; however, credits may be reduced if payments are late or incomplete.

Single Sales Factor Apportionment for Financial Institutions

• Financial institutions must adopt a single sales factor apportionment method beginning with tax year 2025, aligning them with most corporate taxpayers.
• This change replaces the historical three-factor formula and could increase taxable income apportioned to California.

Increased Funding for Film & TV Tax Credits

• The state’s film and television tax credit program now has a much larger cap ($750 million annually) for five years through fiscal 2029-30.
• Productions and industry stakeholders should evaluate eligibility and planning to maximize the benefits under the expanded program.

Strategic and Compliance Considerations

• Pass-through entities should assess whether electing the PTE tax still makes sense under extended rules and altered prepayment dynamics.
• Financial institutions may want to evaluate estimated tax liabilities and compliance procedures in light of the single sales factor requirement.
• Entertainment industry participants should plan for increased availability of credits and evolving qualification criteria.

Resources

California Franchise Tax Board: Senate Bill 132 extends elective PTE tax through 2030.

California Budget Act Analysis: Single sales factor for financial institutions and film tax credit expansion.