California Enacts Apportionment and PTET Changes

On June 27, California enacted S.B. 132, which includes two significant tax changes. Specifically, the new law includes an unfavorable change in apportionment for most financial services industry taxpayers filing income tax returns in California, but it also includes good news for owners of pass-through entities.

Single-sales factor for financial businesses

For tax years beginning before Jan. 1, 2025, California requires taxpayers that derive more than 50% of their gross business receipts from certain business activities, including banking or financial business activity, to apportion their taxable income or loss by an evenly weighted three-factor formula consisting of sales, property, and payroll.

S.B. 132 generally provides that, for tax years beginning on or after Jan. 1, 2025, taxpayers engaged in a banking or financial business activity must apportion their taxable income or loss using a single-sales factor.

Crowe observation

The apportionment change is expected to have a significant impact on the banking and financial services industry. The state Senate’s analysis estimates the change will increase California revenues between $260 million and $330 million annually for the next four years.

The change to single-sales apportionment is applicable to the 2025 tax year. Banks and financial services organizations will have to adjust their 2025 estimated tax liability to account for the apportionment change.

PTET extension and relief

Originally set to expire after the 2025 tax year, S.B. 132 extends the pass-through entity elective tax from 2026 to 2030.

Additionally, S.B. 132 provides that, starting with the 2026 tax year, qualified pass-through entities that make a late prepayment of the California PTET (originally due June 15 each year) still will be eligible to the make the election when they file their California return and consenting owners will be allowed to claim a credit. However, the credit is reduced by 12.5%.

Looking ahead

S.B. 132 includes a number of tax changes, two of which are significant for different categories of taxpayers. The new law generally will increase tax for banks and financial institutions. At the same time, pass-through entity owners will continue to be able to benefit from an enhanced PTET regime. Affected taxpayers should consult their tax advisers to evaluate how the new legislation affects them and determine potential next steps.