California has enacted legislation that:
decouples for personal income tax purposes from the federal limitations on IRC Sec. 163(j) business interest deductions enacted under the Tax Cuts and Jobs Act and Coronavirus Aid, Relief, and Economic Security Act, fixing a drafting error from Ch. 231 (S.B. 711), Laws 2025, and making the California personal income tax treatment consistent with the corporate tax treatment;
repeals state conformity to IRC Sec. 1446(f), because a misalignment between the federal definition of effectively connected income and the treatment of California-source income made it difficult for taxpayers to comply with the withholding requirements;
clarifies for purposes of the California earned income tax credit that California’s modified disqualified investment income amount will remain at $3,400 regardless of changes made to the federal disqualified investment income amount;
conforms to federal law that clarifies that excess business loss for non-corporate taxpayers does not include deductions, gross income, or gains attributable to any trade or business of performing services as an employee; and
deletes outdated IRC references and makes other technical corrections.
The legislation takes effect immediately and applies retroactively to taxable years beginning on or after January 1, 2025, except that various technical corrections apply in the same manner and for the same periods as specified for federal purposes or, if later, the date of incorporation. Ch. 236 (S.B. 1435), Laws 2026, effective as noted ; Bill Analysis, California Franchise Tax Board, August 2026; Bill Analysis, Committee on Revenue and Taxation, August 2026
