On September 14, 2026, Governor Gavin Newsom signed SB 1435, which makes "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), relating to limitation on business interest, 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 incorporated 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), relating to the limitation on business interest, for corporate income tax purposes, it did not specifically do so for personal income tax purposes.

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

Implications

Given this legislative change is retroactively effective to tax years beginning on or after January 1, 2025, taxpayers with business interest subject to the provisions of 163(j) limitation should take this change into consideration when filing their 2025 California individual income tax return. Those who have already filed their 2025 individual income tax return should consider evaluating if filing an amended 2025 return is appropriate. Taxpayers also should consider the impact of this change on their 2026 estimated tax payments.