Tax insight

California enacts IRC conformity, environmental credits legislation

Insight
5 minute read
October 22, 2025

What happened?

California Governor Gavin Newsom (D) on October 1 signed two bills impacting the state’s IRC conformity.

S.B. 711 updates the state’s general “specified date” of conformity to various IRC personal and corporate income tax provisions from January 1, 2015, to January 1, 2025, effective for tax years beginning on or after January 1, 2025. The legislation also adjusts California’s selective conformity, conforming to some federal provisions--such as IRC Section 4501--that disallow deductions for certain federal excise taxes, while also explicitly decoupling from certain IRC provisions. For example, the legislation decouples from the interest expense limitation under IRC Section 163(j) under the Corporate Tax Law (but not the Personal Income Tax Law).

S.B. 302 provides that for tax years beginning on or after January 1, 2026, and before January 1, 2031, taxpayers may exclude from income payments received as a result of a transfer of specified federal environmental credits (while prohibiting the transferee from deducting the amount paid as consideration for the transfer), and transferee taxpayers may exclude from income the value of credit received, in conformity with federal law.

Why is it relevant?

California’s IRC reference date changed for the first time in a decade, and as a result, California now conforms to more than 1,000 changes in federal tax law that have been enacted since January 1, 2015. California also has updated its selective conformity, picking up some new provisions but continuing to decouple from significant portions of the Tax Cuts and Jobs Act (P.L. 115-97, “TCJA”) and the One Big Beautiful Bill Act (P.L. 119-21, “the Act”).

Actions to consider

Taxpayers should review the changes in S.B. 711 and consider the impact on their California income and franchise tax liability for 2025 and beyond. In addition, a perceived drafting oversight has resulted in the Personal Income Tax Law’s continued conformity to Section 163(j), including the changes made by the TCJA, despite decoupling from Section 163(j) under the Corporate Tax Law. Individuals and owners of passthrough entities, including corporations that hold interests in passthrough entities, should consider the implications of this conformity and monitor potential legislative fixes.

Because S.B. 302 is not applicable until 2026, taxpayers who have received refunds from or sold federal environmental credits should consider the impact on their California taxable income base for years prior to 2026.