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California SB 1435: Retroactive Change to the Personal Income Tax Business Interest Limitation
California Senate Bill 1435 corrects a conformity omission affecting business interest deductions for taxpayers subject to California personal income tax. Signed September 14, 2026, the law adds R&TC §17225(c), providing that the federal limitation under IRC §163(j) does not apply for California personal-income-tax purposes for taxable years beginning on or after January 1, 2025.
Individuals and owners of pass-through entities affected by the federal IRC §163(j) limitation should review their 2025 California treatment, pass-through reporting and 2026 estimates. The law does not change the federal calculation or guarantee a refund.
What Changed and What It Means
SB 711 advanced California’s general IRC conformity date to January 1, 2025, and excluded §163(j) for corporate tax purposes, but omitted the corresponding personal income tax provision. SB 1435 corrects that omission through R&TC §17225(c). The change therefore applies retroactively for California personal income tax purposes; it does not revise federal law or create a new corporate benefit.
If no federal §163(j) limitation applied, SB 1435 may not produce an additional California deduction. California nonconformity also does not make all interest automatically deductible. Basis, at-risk, passive-loss, excess-business-loss, capitalization and classification rules may still affect the amount or timing of the deduction.
Federal business interest carryforwards and partnership excess business interest remain subject to federal §163(j). Taxpayers should separately track amounts already deducted in California to avoid a duplicate deduction when a federal carryforward becomes deductible.
What Taxpayers Can Do Now
For 2025 returns still in process, review the applicable state-federal difference before filing. For filed returns, determine whether a deduction was missed and whether an amendment is appropriate; an amendment is not required in every case.
- Use Form 8990, Schedule K-1 information and underlying schedules to identify the federal limitation.
- Coordinate entity and owner reporting and reconcile California deductions with federal carryforward records.
- Update 2026 estimated tax calculations if projected liability changes and retain supporting workpapers.
Owners awaiting corrected pass-through information should confirm the entity-level California schedules before filing or amending. Any benefit should be tested against the complete return and other applicable limitations.
Withum Can Help
Contact your Withum tax advisor to evaluate the impact of SB 1435, coordinate pass-through reporting and determine whether a 2025 amendment or revised 2026 estimates are appropriate.
Have Questions or Need Guidance?
For more information on this topic, please contact a member of our team.
