California's SB 1435: What Changed for 2025, and What Still Doesn't Conform

SB 1435, signed September 14, 2026, is the cleanup bill for California's move to a January 1, 2025 conformity date with the Internal Revenue Code. It mostly updates cross-references, but it makes three changes that matter on 2025 California returns: the EITC investment income limit, business interest and excess business losses.

What the new conformity date does, and doesn't, do

California doesn't adopt federal tax law automatically. The Revenue and Taxation Code picks up the Internal Revenue Code as it stood on a "specified date," and then lists its own exceptions. SB 711 moved that date from January 1, 2015, to January 1, 2025, for taxable years beginning on or after January 1, 2025 (R&TC §17024.5(a)(1)(Q)).

That date cuts both ways:

• Federal changes enacted from 2015 through 2024 now flow through, unless California has a specific exception. That's a decade of federal changes catching up at once, which is why the cleanup bill was needed.
• Anything Congress enacted after January 1, 2025, doesn't. That includes all of P.L. 119-21, the 2025 budget reconciliation act signed July 4, 2025. Its federal changes, such as the employer exclusion for Trump account contributions (IRC §128) and the higher dependent care exclusion (IRC §129), aren't part of California law unless the Legislature adopts them separately.

The three changes SB 1435 made

The FTB summarized the bill in its October 2026 Tax News. Each change applies for taxable years beginning on or after January 1, 2025.

1. California EITC: the investment income limit stays California's own. The federal earned income credit disqualifies taxpayers with investment income above a set limit. California substitutes $3,400 for the federal amount (R&TC §17052(d)), and SB 1435 makes clear that California's figure stays in place regardless of what happens to the federal amount. The statute indexes California's figure with California's own inflation factor, so check the FTB 3514 instructions for the amount that applies to a given year.

2. Business interest: no section 163(j) limit for individuals. Federally, IRC §163(j) limits the business interest deduction based on adjusted taxable income. California already didn't follow that limit for corporations. SB 1435 adds the same rule to the Personal Income Tax Law: "Section 163(j) of the Internal Revenue Code, relating to limitation on business interest, shall not apply" (R&TC §17225(c)). For an individual, or a partner or S corporation shareholder, with interest limited on the federal return, the California deduction can be larger. That creates a federal and California difference to track every year after.

3. Excess business losses: California follows the CARES Act clarification on wages. California has its own version of the excess business loss limit (R&TC §17560.5). SB 1435 conforms to one piece of section 2304 of the CARES Act (P.L. 116-136): the excess business loss is figured without regard to deductions, income or gains from performing services as an employee. In plain terms, W-2 wages don't count as business income that soaks up a business loss.

What California still does differently

The conformity date doesn't erase California's long list of modifications. A few that come up most on returns for individuals and owner-run businesses, as the statutes read after SB 1435:

• Bonus depreciation. California doesn't allow federal bonus depreciation under IRC §168(k), and it doesn't follow the federal qualified improvement property classification in §168(e)(6) (R&TC §17250(a)(7), (11)).
• Business interest. As above, no §163(j) limit for individuals or corporations.
• Excess business losses. California's limit has no federal end date, and a disallowed loss carries forward as a California excess business loss, not as a net operating loss (R&TC §17560.5(b)).
• NOL suspension. For taxable years beginning in 2024 through 2026, California denies the net operating loss deduction to taxpayers with net business income or modified adjusted gross income of $1,000,000 or more, and it extends the carryover period for the suspended losses (R&TC §17276.24).
• Alimony. California still follows the old alimony deduction rule, but only for divorce or separation instruments executed by December 31, 2025, and not later modified to adopt the new rule (R&TC §17201.3).
• P.L. 119-21. None of the 2025 federal act's changes apply in California unless separately adopted.

What I'd do

• Before filing an extended 2025 California return, check whether a federal §163(j) limit or excess business loss applies. Both now have California-specific answers, and the California numbers can differ from the federal ones.
• Keep a running federal and California difference schedule for depreciation, interest carryforwards and excess business losses. These don't reverse quickly, and reconstructing them later is expensive.
• Don't assume a 2025 federal tax break carries to California. If it came from P.L. 119-21, assume it doesn't until the Legislature says otherwise.
• If you claim the California EITC, check investment income against the FTB 3514 instructions for the year.

Extended 2025 California returns are due October 15, 2026. If you have a business loss, a large interest expense or a carryforward that needs a California-only calculation, I'm glad to work through it with you. Send an inquiry, or see how I handle tax preparation and planning.

General information, not advice for your situation. The rules here are for California taxable years beginning in 2025, as checked on the date above.