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06 October 2025

California Governor signs bill to exclude refund payments for specified federal environmental credits from gross income for 2026—2030

  • The governor of California signed SB 302 on October 1, 2025, which excludes refund payments for specified federal environmental credits under IRC Sections 6417 and 6418 from California gross income.
  • The new provisions apply to tax years beginning on or after January 1, 2026, and before January 1, 2031.
 

On October 1, 2025, the California Governor signed SB 302, which excludes from a taxpayer's gross income refund payments for specified federal environmental credits and payments received by a transferor as consideration for a transfer of the value of the credits.

SB 302 adds new Cal. Rev. and Tax. Code (CRTC) Sections 17132.3 (personal income tax) and 24310.5 (corporate income tax). Under these new provisions and applicable to tax years beginning on or after January 1, 2026, and before January 1, 2031, gross income does not include the following:

  • Any payment made under IRC Section 6417,1 as added by P.L. 117-169, related to elective payments of applicable federal environmental credits
  • Any payment made under IRC Section 6418,2 as added by P.L. 117-169, relating to the transfer of certain federal environmental credits

Payments made under IRC Section 6418 include the value of a credit received by a transferee.

When introduced, the proposed bill language stated that the provision would be applicable for tax years beginning on or after January 1, 2023. The final bill language, however, was revised to be applicable to tax years beginning on or after January 1, 2026.

Implications

Before SB 302 was signed into law, there was uncertainty regarding California's treatment of the income derived from the refund payments. Now taxpayers have more certainty regarding California's treatment and welcome conformity for tax years beginning on or after January 1, 2026. However, for tax years before January 1, 2026, it is more likely that California will not conform to the nontaxable federal treatment with the implication that California would consider the payments and transfers taxable and included in California taxable income.

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Endnotes

1 Under IRC Section 6417 an "applicable entity' can make a direct-pay election (effectively treating tax credits generated by a renewable energy project as equivalent to taxes paid on a filed return) for certain energy credits.

2 Under IRC Section 6418, an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit to an unrelated transferee taxpayer. Federal "One Big Beautiful Bill Act" (P.L. 119-21) leaves the transferability provisions largely intact but prohibits the transfer of eligible tax credits to specified foreign entities.

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Contact Information

For additional information concerning this Alert, please contact:

State and Local Taxation Group

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor

Document ID: 2025-2021

 

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