A bill introduced in the California Senate (SB 1435) on March 11, 2026, would make "clean-up" changes to the state's Internal Revenue Code (IRC) conformity laws for personal and corporate income tax purposes, most notably, by clarifying that California decouples from the federal business interest expense limitation under IRC Section 163(j) for personal income tax purposes.

On October 1, 2025, California Governor, Gavin Newsom, signed SB 711, which updated California's conformity to the IRC for both personal and corporate income tax purposes for the first time in a decade. As of October 1, 2025, California selectively incorporates specific provisions of the IRC as of January 1, 2025 (from the IRC as of January 1, 2015). While California now conforms to many of the federal tax changes enacted since January 1, 2015, the state continues to decouple from several changes enacted by the federal Tax Cuts and Jobs Act (TCJA). California also does not conform to the changes made by the One Big Beautiful Bill Act (P.L. 119-21, OBBBA), as it was enacted on July 4, 2025. (See Tax Alert 2025-2032.)

While SB 711 specifically decoupled from IRC Section 163(j) for corporate income tax purposes, it did not specifically do so for personal income tax purposes.

SB 1435 would add Cal. Rev. and Tax. Code (CRTC) Section 17225(c) to specifically decouple from the business interest limitation provisions of IRC Section 163(j) for personal income tax purposes, retroactively applicable to tax years beginning on or after January 1, 2025. This proposed nonconformity language mirrors the corporate income tax nonconformity language enacted under SB 711.

Implications

The California legislature has stated its intent to decouple from IRC Section 163(j) broadly and that SB 711 inadvertently missed the decoupling provisions for IRC Section 163(j) for personal income tax purposes. Further, the California Franchise Tax Board's "Summary of Federal Income Tax Changes" (as of March 12, 2026) indicates that California does not conform to IRC Section 163(j), listing both CRTC Sections 17201 (corporate income tax) and 17225 (personal income tax) as relevant CRTC provisions.

SB 1435 will now go through the legislative process, which may take several months. This could include being amended into California's budget bill, which typically is enacted by the end of June.

EY will continue to monitor this development and issue additional Alerts as warranted.