You filed. The bill got paid. And now, for a lot of California business owners doing $1M or more in revenue, the tax conversation quietly goes dark for another eight months.
That gap is where money gets left on the table. Mid-year tax planning for California businesses isn’t a nice-to-have. It’s the difference between arriving at year-end with options and arriving in April with regrets. The decisions that determine what you’ll owe in 2027 are being made right now, whether you’re making them intentionally or not.
Here’s where to focus your attention before Q3 starts.
Start with Your Q2 Estimated Tax Payment
The second federal quarterly estimated tax payment was due June 15. For California businesses, the FTB follows a different schedule than the IRS: the California installment pattern requires 30% of your estimated annual liability by April 15, 40% by June 15, nothing in September, and 30% by January 15 of the following year.
If your business performed stronger in the first half of 2026 than it did in 2025, last year’s figures are an insufficient baseline for your payments. The IRS safe harbor rule allows most taxpayers to avoid underpayment penalties by paying at least 100% of the prior year’s tax liability, or 90% of the current year’s actual liability, whichever is smaller. California has a parallel safe harbor rule through the FTB. But if your income is growing meaningfully year over year, simply matching last year’s payments may leave you with a large balance due in April and accumulated penalties.
Now is the right time to run a projection based on actual Q1 and Q2 performance. If the numbers are running ahead of prior year, recalibrate your remaining payments before Q3 closes.
The California PTE Election: If You Missed June 15, You Still Have Options
The California pass-through entity elective tax is one of the highest-value planning tools available to California S-corporations, partnerships, and LLCs taxed as partnerships. It allows qualifying entities to pay a 9.3% entity-level tax on the owners’ qualified net income, which the owners then receive as a California tax credit on their personal returns. Because the entity deducts the payment at the federal level, it functions as a workaround for the federal SALT deduction cap, which rose to $40,000 for 2025 under the One Big Beautiful Bill Act but phases out at higher income levels.
For 2026 and beyond, the PTE election has been extended through 2030 under SB 132. The required initial payment for the 2026 election year was due June 15, equal to the greater of 50% of the prior year’s PTE elective tax or $1,000.
Here is the important change for 2026: unlike prior years, missing the June 15 payment no longer disqualifies your entity from making the PTE election. Under the updated rules, a qualifying entity that misses or underpays the June 15 deadline can still elect the PTE tax for the year. However, the qualifying taxpayers will have their credit reduced by 12.5% of their pro rata share of the unpaid amount. That penalty makes timely payment significantly more valuable, but it also means the window has not closed entirely for those who missed it.
If your entity has not made a 2026 PTE election and the math supports it, this conversation should happen now with your CPA, not in the fall when planning options narrow.
Bonus Depreciation: Federal and California Are Moving in Different Directions
The One Big Beautiful Bill Act permanently reinstated 100% federal bonus depreciation for qualified property placed in service after January 19, 2025. For a California business that purchased or is planning to purchase significant equipment, vehicles, or other qualifying assets in 2026, the federal treatment is more favorable than it has been in years.
California, however, does not conform to the OBBBA. The FTB has confirmed that, in general, California’s Revenue and Taxation Code does not conform to the changes made under the One Big Beautiful Bill Act. California has its own depreciation rules that have historically not followed federal bonus depreciation, with a California Section 179 deduction cap set at $25,000 for corporations, well below the federal limit.
In practical terms, this means a California business that takes full advantage of federal bonus depreciation may end up with a significantly different California taxable income than federal taxable income. That mismatch can create a meaningful California tax liability even in a year where federal liability appears low. Before making or timing a major equipment purchase, model both the federal and California treatment explicitly. The after-tax cost of an asset looks different depending on which tax it is calculated against.
Check Whether Your Entity Structure Still Makes Sense
Mid-year is one of the better moments to run a quick entity structure review, because there is still time to act on what you find. The two most common situations that surface in this review for California businesses at the $1M-$5M revenue level are:
- S-corp election timing. If you are operating as a single-member LLC or partnership and your net income has grown past the threshold where an S-corp election would materially reduce your self-employment tax exposure, the election needs to happen before the applicable deadline to be effective for the next tax year. For most businesses, the break-even point where an S-corp election pays off is somewhere in the $40,000 to $80,000 range of net profit, though the actual calculus depends on California-specific franchise tax treatment and your owner compensation structure. Talk to your CPA about the specific timeline for your situation.
- California LLC fee planning. California LLC fees are based on gross receipts, not profit. The tiers jump at $250,000, $500,000, $1,000,000, and $5,000,000 in gross receipts. If your business is tracking toward a higher fee tier than last year, that fee should be accounted for in your cash flow planning now, not discovered at filing time.
Align Your Compensation and Distribution Strategy Before Year-End
For S-corp owners, the mix of W-2 salary and profit distributions has direct consequences for self-employment tax exposure, California payroll tax, and retirement contribution limits. If your business has grown significantly in the first half of 2026, your current compensation structure may no longer reflect market rates for the services you are performing. The IRS requires that S-corp owner-employees receive reasonable compensation for their work, with distributions paid above that baseline. Running the compensation analysis mid-year, rather than in December, gives you time to adjust payroll through the back half of the year without the pressure of a year-end deadline.
Retirement contributions are directly affected by your compensation structure. SEP-IRA contribution limits for 2026 are the lesser of $72,000 or 25% of compensation. SIMPLE IRA employee deferral limits are $17,000 for most employers, with a higher $18,100 limit for qualifying small employers with 25 or fewer employees under SECURE 2.0. Solo 401(k) employee deferrals must be elected by December 31, though contributions can follow the filing deadline. None of these levers work optimally if the compensation conversation doesn’t happen until March.
Get a Mid-Year Projection on Paper
Everything above depends on a reasonably accurate picture of where 2026 is actually headed. A mid-year projection doesn’t need to be complicated. Using Q1 and Q2 actuals as a baseline, annualize your revenue and expenses, account for any known changes in the second half, and produce a working estimate of your full-year taxable income.
That projection drives every other decision: whether your remaining estimated tax payments are adequate, whether the PTE election math supports making the payment, whether a major purchase should happen in 2026 or wait, and whether your compensation structure needs adjustment. Without it, each of these decisions gets made in isolation, based on incomplete information.
The California-specific complexity of mid-year tax planning is real. Federal and state rules diverge frequently and meaningfully, and the consequences of those divergences show up as unexpected California tax bills for businesses that only modeled their federal position. The mid-year window is when those divergences are still addressable.
Frequently Asked Questions
What is the California FTB estimated tax payment schedule for 2026?
California’s estimated tax payment schedule differs from the federal schedule. For calendar-year taxpayers, the FTB requires 30% of your estimated annual liability by April 15, 40% by June 15, 0% in September, and 30% by January 15 of the following year. This differs from the IRS schedule, which requires roughly equal quarterly payments. Businesses should confirm their specific obligations at ftb.ca.gov.
What is the California pass-through entity tax and who qualifies?
The California PTE elective tax allows S-corporations, partnerships, and LLCs taxed as partnerships to pay a 9.3% entity-level tax on qualified net income. Qualifying owners receive a corresponding California tax credit, effectively shifting state taxes from the personal to the entity level. The election is available for tax years 2026 through 2030 under SB 132. The initial payment for the 2026 election year was due June 15, 2026.
Does California conform to the OBBBA bonus depreciation changes?
No. The FTB has confirmed that California’s Revenue and Taxation Code does not conform to the One Big Beautiful Bill Act in general. California has its own depreciation rules and has historically not adopted federal bonus depreciation provisions. California businesses that take significant federal bonus depreciation deductions may owe California tax on income that is sheltered federally. A CPA should model both treatments before any major asset purchase.
When does an S-corp election need to happen to be effective for the next tax year?
For a calendar-year business, the S-corp election can be filed at any time during the tax year preceding the year it is intended to take effect, or within two months and 15 days of the start of the intended effective year. For a business wanting S-corp status effective January 1, 2027, the election can be filed at any point in 2026 or by March 15, 2027. California has its own S-corp election rules under the FTB. Confirm your specific situation and timeline with a CPA.
What is the safe harbor rule for estimated tax payments in California?
California’s safe harbor rules depend on your income level. For most taxpayers, you can avoid underpayment penalties by paying the lesser of 90% of the current year’s actual tax liability or 100% of the prior year’s tax. For taxpayers with prior-year California AGI above $150,000, the prior-year option increases to 110% of the prior year’s tax. For taxpayers with California AGI at or above $1,000,000, the prior-year safe harbor is not available at all. Those taxpayers must pay based on 90% of the current year’s actual tax. Details are available at ftb.ca.gov.
The Mid-Year Window Is the One That Actually Changes Your Tax Bill
April is where you find out what last year cost you. Mid-year is where you decide what next April will cost. The California-specific decisions that move the needle most, the PTE election, the entity structure review, the compensation recalibration, the depreciation timing, are all decisions that require time to execute. Waiting until Q4 compresses that window significantly.
If your business is doing $1M or more in California revenue and you haven’t had a mid-year planning conversation yet, that conversation is the most valuable tax move available to you right now.
MBS Accountancy works with California businesses doing $1M to $20M in revenue on year-round tax planning and advisory. If you’d like to run the numbers on your mid-year position, a free 20-minute call is the right starting point.