WeVote
Log In

Bill

Bill

SB 1435

Personal Income Tax Law and Corporation Tax Law: federal conformity.

2025-2026 Regular Session

SB 1435 adopts modified federal conformity for 2025, notably allowing full business interest deductions for California personal income tax purposes, decoupling from the federal cap

From committee with author's amendments. Read second time and amended. Re-referred to Com. on REV. & TAX.
#personalincometaxlawandcorporationtaxlaw #federalconformity
0
WeVote Research Nonpartisan
Bill Summary · SB 1435

Summary of SB 1435 (2025-2026) – California Personal Income Tax Law and Corporation Tax Law: Federal Conformity

Note: This summary focuses on the substantive provisions, targeted changes, who would be affected, and timing/operational details discernible from the bill text.

1) Purpose and Intent

  • The bill aims to update California’s Personal Income Tax Law (PITL) and Corporation Tax Law to reflect and conform with federal Internal Revenue Code (IRC) changes as of a specified date, with an emphasis on reducing confusion from outdated or repealed references.
  • It seeks to implement broader conformity with federal definitions and rules for purposes of California’s tax code for taxable years beginning on or after January 1, 2025, including by deleting outdated references to repealed federal provisions and adjusting conformity mechanics.

Key framing points:
- The bill states that the federal conformity date for incorporated IRC sections is January 1, 2025 for taxable years beginning after that date, unless otherwise provided.
- It also explicitly references that the conformity is “modified” in some areas (notably around business interest deduction and related federal limits) to align with California’s approach.

2) Key Provisions and Changes

A. Federal Conformity Updates

  • The bill updates many references to the Internal Revenue Code in multiple sections of the Revenue and Taxation Code to reflect current federal law as of 2025.
  • It repeals some outdated California references and redefines how federal provisions are applied for the state.

B. Business Interest Deduction (Section 17024.5 and related language)

  • A notable substantive change concerns the deduction for business interest:
    • Under federal law (and in some states), there is a limitation on the deduction of business interest based on adjusted taxable income.
    • California’s PITL and Corporation Tax Law currently do not conform to this federal limitation.
    • SB 1435 would provide that, for taxable years beginning on or after January 1, 2025, the federal limitation on the deductibility of business interest does not apply for purposes of the Personal Income Tax Law (PITL).
    • This is described as “modified conformity” and would effectively allow California residents to deduct business interest without the federal cap when calculating California personal income tax, but the language in the bill notes that conformity changes also require proper accounting under California rules.

C. Individual Credits and Provisions

  • The bill includes provisions related to:
    • California Earned Income Tax Credit (CalEITC) structure, computation, phaseouts, and annual adjustments. These provisions modify:
    • Credit percentage and phaseouts by filing status and number of qualifying children.
    • Earned income thresholds and phaseout amounts, which are tied to the California inflation adjustments and CPI benchmarks.
    • Provisions for annual recomputations aligned with California’s bracket adjustments and a mechanism to refund excess credits to the Tax Relief and Refund Account when applicable.
    • Net effect: changes to how CalEITC is computed, adjusted annually, and administered.

D. Net Operating Losses (NOLs) and Related Provisions

  • The bill repeals and revises several prior NOL-related sections (17250, 17276-series) to synchronize with federal NOL rules as incorporated into California code.
  • It introduces criteria for “qualified taxpayers,” modifications to carryforward/carryback rules, and special considerations for certain districts (e.g., Los Angeles Revitalization Zone) and Pierce’s disease considerations for agriculture.
  • The NOL provisions include several transitional rules, eligibility requirements, and special designations for agricultural or regional zones.

E. Other Technical and Conforming Adjustments

  • Revisions to accounting for interest, depreciation (including certain property like grapevines), and various IRC sections related to pensions, alimony, and other areas are updated to reflect federal conformity while preserving California-specific modifications.

3) Who/What Would Be Affected

  • California individual taxpayers (PITL) and California corporate taxpayers (Corporation Tax Law) would be affected by conformity updates and the treatment of federal provisions.
  • Taxpayers claiming CalEITC would be impacted by revised credit amounts, phaseouts, and reporting requirements.
  • Businesses with significant interest deductions and debt financing would see changes in how their interest deductions are treated for California taxes (potentially more favorable relative to federal limits for PIT purposes).
  • Net operating loss taxpayers, including farms/fruits operations affected by Pierce’s disease, Los Angeles Revitalization Zone participants, biopharmaceuticals, and biotech sectors, would be affected by updated NOL carryovers and designations.
  • Administrative and fiscal officers at the Franchise Tax Board (FTB) would implement new regulations and guidance, including potential emergency regulations for certain provisions.

4) Procedural and Timeline Aspects

  • Effective date: The bill states an immediate effect for the tax-related conformity to be used for taxable years beginning on or after January 1, 2025, with a tax levy mechanism.
  • Emergency/regulatory authority: The bill grants the Franchise Tax Board authority to issue regulations, including emergency regulations, to implement new provisions and prevent improper claims or improper payments.
  • Revision and updating of references: The bill requires updating numerous sections of the Revenue and Taxation Code to reflect the current IRC date and to delete outdated references.
  • Annual reporting: The CalEITC provisions require annual reporting by the FTB on usage and impact, including poverty-reduction metrics and distribution analyses.

Overall, SB 1435 modernizes California’s tax conformity with federal law, with a particular emphasis on allowing full business interest deductions for California personal income tax purposes beginning in 2025, while updating earned income tax credits and net operating loss provisions to reflect current federal rules and state-specific policies.

Compiled from official sources — confirm details with the bill’s official record.

Sign in to ask a question.