California S Corp Year-End Tax Planning for 2026: 8 Moves Before December 31

Year-end tax planning for a California S Corp comes down to a handful of decisions that have to be finished by December 31. Once the year closes, most of them either move to next year or aren't available at all.

We handle tax planning for hundreds of S Corp owners from our office in Concord. Most of them want to know two things before the year ends: how much salary is enough, and whether the PTET election is still worth it. This guide covers those questions and the rest of the year-end list for 2026, including the places where California's rules split from the federal ones.

Here's the list we review with clients before the last payroll of the year:

1. Set your salary for the year
2. Decide on the California PTET election
3. Put equipment and vehicles in service
4. Fund your 401(k) through payroll
5. Put owner health insurance on your W-2
6. Check your basis before distributions or losses
7. Clean up reimbursements, Augusta Rule rentals and minutes
8. Get ready for the January deadlines

Reasonable compensation: set your S Corp salary before the last payroll

If you work in your S Corp, the IRS expects you to pay yourself reasonable compensation before you take distributions. In practice, that's roughly what the company would have to pay someone else to do your job, given your role, your hours and what similar businesses in your area pay.

A salary set in January can look very different by December. If profits doubled this year and your distributions doubled with them, a salary that seemed fine in the spring may now look thin next to them. Low pay paired with large distributions is what the IRS looks for in S Corp audits.

Any change has to run through payroll by your final 2026 pay date. A bonus paid on January 5 is 2027 wages, even if it's for work you did in 2026. We prepare a written reasonable compensation analysis for our S Corp clients each year, because it's usually the first thing requested in an audit.

Your salary also sets the ceiling for your 401(k) contributions and affects your qualified business income (QBI) deduction, which is why we settle it before anything else on this list.

California PTET in 2026: should your S Corp elect?

California's pass-through entity elective tax, usually called PTET, lets your S Corp pay California income tax on your share of the profit. The company pays 9.3% of each consenting owner's income, deducts that payment on its federal return, and each owner claims a matching credit on their California return. The state extended the program through 2030, so it's available again for 2026.

It still matters because of the federal cap on deducting state and local taxes. That cap rose to $40,400 for 2026, but it shrinks by 30 cents for every dollar of income above $505,000 and never drops below $10,000. Plenty of California S Corp owners are past that range, which leaves them with a $10,000 deduction against a much larger California tax bill. PTET moves the tax onto the S Corp's return, where the cap doesn't apply, and the 2025 federal tax law left that workaround in place.

A simplified example

Say you and your spouse own an S Corp that passes $500,000 of profit through to you, and your household income is about $650,000. At that income, your personal SALT deduction is stuck at $10,000.

If the S Corp elects PTET, it pays $46,500 of California tax for you (9.3% of $500,000) and deducts it federally. You claim a $46,500 credit on your California return, so your total California tax stays about the same. On the federal side, your taxable income drops by $46,500, which in the 35% bracket is worth roughly $16,000. This leaves out other parts of your return, such as the QBI deduction, that can shift the result.

If your income is well under $505,000, the math is closer. The higher SALT cap may already cover your California tax, and PTET's main benefit becomes leaving room under the cap for property taxes. We run it both ways before recommending it.

What to do before December 31

• Run your 2026 numbers with and without the election.
• Consider paying the balance in December. The federal deduction generally follows the year the S Corp pays, so a December 2026 payment counts on your 2026 return and a March 2027 payment counts on 2027.
• If you missed the June 15 payment, you can still elect. Starting with 2026, a missed or short June payment no longer disqualifies the election. It reduces each owner's credit by 12.5% of their share of the shortfall.

The election itself is made on the S Corp's 2026 return, which has to be filed on time; it can't be added on an amended return. Any remaining balance is due by March 15, 2027, even if the return is extended.

Bonus depreciation and Section 179: federal vs. California rules

The federal rules for equipment are about as generous as they've been. Bonus depreciation is back at 100% permanently for property acquired after January 19, 2025, and the Section 179 limit for 2026 is $2,560,000. For most small businesses, the full cost of equipment is deductible in the year it's put to use.

That last condition is where December purchases go wrong. The asset has to be placed in service by December 31, meaning delivered, set up and ready to work. If you pay for a truck on December 20 and it arrives January 8, the deduction belongs to 2027.

California follows neither federal rule. It allows no bonus depreciation, and its Section 179 deduction is capped at $25,000, phasing out once purchases pass $200,000. Buy $100,000 of equipment and you may deduct all of it federally in year one but only part of it in California, with the rest depreciated over several years. Factor that in when you estimate what a purchase will save.

Vehicles have separate limits based on weight, and business use generally has to be more than 50%, which a mileage log has to back up. If your S Corp owns or improves its building, a cost segregation study can move part of that cost into faster write-offs. And buy what the business actually needs. A deduction gives back a fraction of the price, so spending cash only to lower the tax bill usually leaves you with less of it.

S Corp 401(k) contributions: what has to happen through payroll

As an S Corp owner, your retirement contributions are based on your W-2 salary, not your share of the profit. A 401(k) has two parts, and they run on different deadlines.

Your own salary deferrals have to come out of 2026 paychecks, so they're due by your last 2026 payroll. The 2026 limit is $24,500, plus an $8,000 catch-up if you're 50 or older, or $11,250 if you're between 60 and 63. The company's profit-sharing contribution, generally up to 25% of your W-2 salary, can be made after year-end, up to the S Corp's filing deadline. Combined, they're capped at $72,000 for 2026, not counting catch-ups.

One change for 2026 catches people off guard. If your 2025 wages from the S Corp were over $150,000, any catch-up contribution you make this year has to go in as Roth. If your plan doesn't have a Roth option, you can't make catch-up contributions until the plan is amended, so check with your plan provider before your last payroll.

If you don't have a plan yet, setting one up now still lets you defer from your remaining 2026 paychecks. A plan adopted after December 31 can still take the company's 2026 contribution, but your own deferrals for 2026 are gone. We can help you choose a plan as part of our retirement planning work.

S Corp owner health insurance: get the premiums on your W-2

If you own more than 2% of your S Corp, health insurance gets different treatment. The company pays or reimburses your premiums and adds them to your W-2 as wages in Box 1. You then deduct them on your personal return. Handled correctly, the premiums are deductible and aren't subject to Social Security or Medicare tax.

The usual problem is that the premiums never make it onto the W-2, which puts the deduction at risk and means corrected forms if it's caught after filing. Before your last payroll, have the S Corp reimburse any premiums you paid personally, and send your payroll provider the full-year total, including coverage for your spouse and dependents.

S Corp basis: check it before year-end distributions or losses

Basis is roughly what you've put into the S Corp plus the profit you've left in it. Profits and contributions raise it, and distributions and losses lower it. It decides whether your distributions are tax-free and whether you can deduct the company's losses.

Take a look before December 31 if you've taken large distributions this year, since anything beyond your basis is taxed as capital gain. The same goes if the S Corp might show a loss, for example after a big equipment purchase, because losses beyond your basis are suspended until you have enough basis to use them. If you have co-owners, check that distributions have followed ownership percentages. Uneven distributions can raise questions about the S Corp election itself.

When basis is short, a capital contribution or a direct loan from you to the company before year-end can add to it. Personally guaranteeing a bank loan to the S Corp doesn't count. Your basis is reported each year on Form 7203 with your personal return.

Accountable plans, the Augusta Rule and corporate minutes

Three smaller items close out the year, and each depends on paperwork that exists by December 31.

As an employee of your own S Corp, you can't deduct business expenses you paid personally on your federal return. The company can reimburse them tax-free under a written accountable plan instead. Home office costs, business mileage, and the business share of your phone and internet are the usual ones. Turn in an expense report with receipts and get reimbursed before year-end so the deduction lands in 2026.

Section 280A(g), often called the Augusta Rule, lets you rent your home to your S Corp for up to 14 days a year. The rent is deductible to the company and tax-free to you. It holds up when there's a rental agreement, support for a fair market rate, a real business purpose for each day, and payment from the business account. If you've held meetings at home this year, make sure that file is complete and the rent is paid by December 31.

California corporations are also expected to hold an annual shareholder meeting and keep minutes. That's where the year's major decisions belong: officer salary, distributions, the accountable plan, any home rentals, a new retirement plan and the PTET election. If the IRS or the FTB asks why something was done, the minutes are the first thing you'll want to hand over.

January deadlines for S Corp owners

A few dates follow right behind December 31 for a calendar-year S Corp. Our tax deadlines page has the full calendar.

• December 31, 2026: last day for salary changes, 401(k) deferrals, placing equipment in service, expense reimbursements, Augusta Rule rent, and any PTET payment meant for your 2026 federal return
• January 15, 2027: fourth-quarter 2026 estimated tax payments, federal and California
• February 1, 2027: W-2s to employees and Forms 1099-NEC to contractors (January 31 falls on a Sunday)
• March 15, 2027: S Corp returns due (federal Form 1120-S and California Form 100S), along with the PTET election and any balance
• June 15, 2027: first 2027 PTET payment, if you plan to elect again

To avoid federal underpayment penalties, your withholding and estimated payments generally need to cover 100% of last year's tax, or 110% if last year's income was over $150,000. California uses the same 110% rule, except that taxpayers with income of $1 million or more have to base payments on the current year. If you're behind, extra withholding from your final paycheck helps more than a late estimate, because withholding is treated as paid evenly through the year.

There's one piece of good news. For payments made in 2026, you only need to file a Form 1099-NEC for contractors you paid $2,000 or more, up from $600. It's still worth collecting Forms W-9 now so January isn't a scramble.

Frequently asked questions

What's the deadline for S Corp year-end tax planning?

December 31 covers most of it: salary changes, 401(k) deferrals, equipment and reimbursements. The company's retirement contribution can wait until the S Corp's filing deadline, and the PTET election is made on the return due March 15.

Can I pay myself a bonus in January and count it for 2026?

No. Wages count in the year they're paid, so a January paycheck is 2027 salary.

Should my California S Corp elect PTET for 2026?

Often, if your income is high enough that the federal SALT cap has dropped toward $10,000. That happens between $505,000 and about $606,000 of income. Below that range, run the numbers first.

Can I still elect PTET if I missed the June 15 payment?

Yes, for 2026 through 2030. Each owner's credit is reduced by 12.5% of their share of the amount that should have been paid by June 15.

Does California allow bonus depreciation?

No. California doesn't allow federal bonus depreciation and caps Section 179 at $25,000, so most large purchases are depreciated over several years on the California return.

Talk to us before December 31

These decisions affect each other. Your salary sets your retirement limits, and your income level decides whether PTET pays off. That's why we look at them together, using your actual 2026 numbers, while there's still time to act.

API Accounting, Tax & Advisory works with S Corp owners in Concord, across Contra Costa County and throughout California. If you'd like a year-end review, reach out through our contact form to set up a time. The earlier in November we start, the more of these options are still open.

This article is general information based on federal and California tax rules as of October 2026. It isn't tax advice for your situation, so talk with a licensed professional before acting on it.