SB 1435 (Ch.26-236), which cleans up a variety of inadvertent issues that arose as a result of SB 711’s passage in 2025, was signed into law by Governor Newsom. The bill is effective retroactively to the 2025 tax year.
Highlights of the changes made by SB 1435 include:
- Decoupling from the IRC §163(j) business interest expense limitation for Personal Income Tax Law purposes. A drafting error in SB 711 inadvertently conformed California personal income tax law to the IRC §163(j) business interest expense limitation, although it correctly decoupled from the provision for corporation income and franchise tax purposes. This bill corrects that error;
- Clarifying that California only conforms to the current federal treatment of alimony beginning with the 2026 tax year for divorce and separation agreements executed on or after December 31, 2025, or for agreements that existed prior to 2026 if they are modified to specifically incorporate current federal treatment. Under federal law alimony paid is nondeductible by the payor and alimony received is not includable in the recipient’s taxable income for divorce or separation instruments executed after December 31, 2018. The way SB 711 was written it would have applied current federal treatment of alimony for California purposes beginning with the 2027 tax year, even for agreements executed during the 2019 through 2025 tax years;
- Clarifying that the maximum amount of investment income a taxpayer can earn and still be eligible for the California Earned Income Tax Credit is $3,400, regardless of the federally stipulated threshold (which is currently set at $10,000 and adjusted annually for inflation ($11,950 for 2025; $12,200 for 2026));
- Decoupling from the special withholding rules under IRC §1446(f) related to dispositions of partnership interests. This means buyers purchasing a partnership interest from a foreign partner do not have to collect and remit California withholding pursuant to this provision on any gain realized by the seller from the sale; and
- Clarifying that California conforms to the federal technical correction that states that the excess business loss does not include deductions for the trade or business of performing services as an employee.
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