On July 16, California Gov. Gavin Newsom signed Assembly Bill 150, which allows a qualified entity to make an annual pass-through entity (PTE) tax election for tax years beginning on or after Jan. 1, 2021, and before Jan. 1, 2026. The new PTE-level tax election is intended to allow both nonresident and resident partners or shareholders of qualified entities to get the benefit of deducting state and local taxes in excess of the current $10,000 limitation for federal income tax purposes. This legislation includes a clause that would make the PTE tax election inoperative earlier than tax years beginning in 2026 if the specified federal law limiting the annual state and local tax deduction for individuals to no more than $10,000 is repealed. The legislation is consistent with the requirements for deductibility as outlined in IRS Notice 2020-75.Qualified entities include limited partnerships, limited liability partnerships, limited liability companies taxed as partnerships, and S corporations that have corporations, individuals, fiduciaries, estates, or trusts as PTE owners. However, qualified entities do not include PTEs that are permitted or required to be included on a California combined income tax return, publicly traded partnerships, or a PTE that has a partnership as a partner or member. Qualified entities that make the annual irrevocable election on an original timely filed return without regard to an extension agree to pay a 9.3% tax on net income on behalf of those eligible partners, members, and shareholders that provide their consent for the election to the PTE. A partner or member of an electing qualified entity that is disregarded for federal income tax purposes is not eligible to have the PTE pay the tax on its behalf. California will allow the consenting PTE owners to claim a credit on their California income tax returns based on the owners’ pro rata or distributive share of income. The credit is nonrefundable, but the excess credit may be carried forward for up to five years.