text:
(a) No deduction shall be allowed for interest, depreciation, taxes, or amortization paid or incurred in the taxable year under Section 24343, 24344, 24345, or 24349, with respect to substandard housing located in this state, except as provided in subdivision (e).

(b) “Substandard housing” means occupied dwellings from which the taxpayer derives rental income or unoccupied or abandoned dwellings for which both of the following apply:

(1) Either of the following occurs:

(A) For occupied dwellings from which the taxpayer derives rental income, a state or local government regulatory agency has determined that the housing violates state law or local codes dealing with health, safety, or building.

(B) For dwellings that are unoccupied or abandoned for at least 90 days, a state or local government regulatory agency has cited the housing for conditions that constitute a serious violation of state law or local codes dealing with health, safety, or building, and that constitute a threat to public health and safety.

(2) Either of the following occurs:

(A) After written notice of violation by the regulatory agency, specifying the applicability of this section, the housing has not been repaired or brought to a condition of compliance within six months after the date of the notice or the time prescribed in the notice, whichever period is later.

(B) Good faith efforts for compliance have not been commenced, as determined by the regulatory agency.

“Substandard housing” also means employee housing that has not, within 30 days of the date of the written notice of violation or the date for compliance prescribed in the written notice of violation, been brought into compliance with the conditions stated in the written notice of violation of the Employee Housing Act (Part 1 (commencing with Section 17000) of Division 13 of the Health and Safety Code) issued by the enforcement agency that specifies the application of this section. The regulatory agency may, for good cause shown, extend the compliance date prescribed in a violation notice.

(c) (1) When the period specified in paragraph (2) of subdivision (b) has expired without compliance, the government regulatory agency shall mail to the taxpayer a notice of noncompliance. The notice of noncompliance shall be in a form and shall include information prescribed by the Franchise Tax Board, shall be mailed by certified mail to the taxpayer at his or her last known address, and shall advise the taxpayer of (A) an intent to notify the Franchise Tax Board of the noncompliance within 10 days unless an appeal is filed, (B) where an appeal may be filed, and (C) a general description of the tax consequences of that filing with the Franchise Tax Board. Appeals shall be made to the same body and in the same manner as appeals from other actions of the regulatory agency. If no appeal is made within 10 days or if after disposition of the appeal the regulatory agency is sustained, the regulatory agency shall notify, in writing, the Franchise Tax Board of the noncompliance.

(2) The notice of noncompliance shall contain the legal description or the lot and block numbers of the real property, the assessor’s parcel number, and the name of the owner of record as shown on the latest equalized assessment roll. In addition, the regulatory agency shall, at the same time as notification of the notice of noncompliance is sent to the Franchise Tax Board, record a copy of the notice of noncompliance in the office of the recorder for the county in which the substandard housing is located that includes a statement of tax consequences that may be determined by the Franchise Tax Board. However, the failure to record a notice with the county recorder does not relieve the liability of any taxpayer nor does it create any liability on the part of the regulatory agency.

(3) The regulatory agency may charge the taxpayer a fee in an amount not to exceed the regulatory agency’s costs incurred in recording any notice of noncompliance or issuing any release of that notice. The notice of compliance shall be recorded and shall serve to expunge the notice of noncompliance. The notice of compliance shall contain the same recording information required for the notice of noncompliance. No deduction by the taxpayer, or any other taxpayer who obtains title to the property subsequent to the recordation of the notice of noncompliance, shall be allowed for the items provided in subdivision (a) from the date of the notice of noncompliance until the date the regulatory agency determines that the substandard housing has been brought to a condition of compliance. The regulatory agency shall mail to the Franchise Tax Board and the taxpayer a notice of compliance, which notice shall be in the form and include the information prescribed by the Franchise Tax Board. In the event the period of noncompliance does not cover an entire taxable year, the deductions shall be denied at the rate of112 for each full month during the period of noncompliance.

(4) If the property is owned by more than one owner or the recorded title is in the name of a fictitious owner, the notice requirements provided in subdivision (b) and this subdivision shall be satisfied for each owner if the notices are mailed to one owner or to the fictitious name owner at the address appearing on the latest available property tax bill. However, notices made pursuant to this subdivision shall not relieve the regulatory agency from furnishing taxpayer identification information required to implement this section to the Franchise Tax Board.

(d) For the purposes of this section, a notice of noncompliance shall not be mailed by the regulatory agency to the Franchise Tax Board if any of the following occur:

(1) The housing was rendered substandard solely by reason of earthquake, flood or other natural disaster except where the condition remains for more than three years after the disaster.

(2) The owner of the substandard housing has secured financing to bring the housing into compliance with those laws or codes that have been violated, causing the housing to be classified as substandard, and has commenced repairs or other work necessary to bring the housing into compliance.

(3) The owner of substandard housing that is not within the meaning of housing accommodation, as defined in subdivision (d) of Section 35805 of the Health and Safety Code, has done both of the following:

(A) Attempted to secure financing to bring the housing into compliance with those laws or codes that have been violated, causing the housing to be classified as substandard.

(B) Been denied that financing solely because the housing is located in a neighborhood or geographical area in which financial institutions do not provide financing for rehabilitation of any of that type of housing.

(e) The provisions of this section do not apply to deductions from income derived from property rendered substandard solely by reason of a change in applicable state or local housing standards unless those violations cause substantial danger to the occupants of the property, as determined by the regulatory agency which has served notice of violation pursuant to subdivision (b).

(f) The owner of substandard housing found to be in noncompliance shall, upon total or partial divestiture of interest in the property, immediately notify the regulatory agency of the name and address of the person or persons to whom the property has been sold or otherwise transferred and the date of the sale or transference.

(g) By July 1 of each year, the regulatory agency shall report to the appropriate legislative body of its jurisdiction all of the following information, for the preceding calendar year, regarding its activities to secure code enforcement, which shall be public information:

(1) The number of written notices of violation issued for substandard housing under subdivision (b).

(2) The number of violations complied with within the period prescribed in subdivision (b).

(3) The number of notices of noncompliance issued pursuant to subdivision (c).

(4) The number of appeals from those notices pursuant to subdivision (c).

(5) The number of successful appeals by owners.

(6) The number of notices of noncompliance mailed to the Franchise Tax Board pursuant to subdivision (c).

(7) The number of cases in which a notice of noncompliance was not sent pursuant to the provisions of subdivision (d).

(8) The number of extensions for compliance granted pursuant to subdivision (b) and the mean average length of the extensions.

(9) The mean average length of time from the issuance of a notice of violation to the mailing of a notice of noncompliance to the Franchise Tax Board where the notice is actually sent to the Franchise Tax Board.

(10) The number of cases where compliance is achieved after a notice of noncompliance has been mailed to the Franchise Tax Board.

(11) The number of instances of disallowance of tax deductions by the Franchise Tax Board resulting from referrals made by the regulatory agency. This information may be filed in a supplemental report in succeeding years as it becomes available.

(h) The provisions of this section relating to substandard housing consisting of abandoned or unoccupied dwellings do not apply to any lender engaging in a “federally related transaction,” as defined in Section 11302 of the Business and Professions Code, who acquires title through judicial or nonjudicial foreclosure, or accepts a deed in lieu of foreclosure. The exception provided in this subdivision covers only substandard housing consisting of abandoned or unoccupied dwellings involved in the federally related transaction.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 168. Effective January 1, 2001.)

article: 3. Items Not Deductible


kind: section

code: RTC

text: Section 277 of the Internal Revenue Code, relating to deductions incurred by certain membership organizations in transactions with members, shall apply, except as otherwise provided.

history: (History: Amended by Stats. 1993, Ch. 877, Sec. 58. Effective October 6, 1993.)

division: 2. OTHER TAXES

part: 11. CORPORATION TAX LAW

chapter: 7. Net Income

article: 3. Items Not Deductible

path: 2. OTHER TAXES > 11. CORPORATION TAX LAW > 7. Net Income > 3. Items Not Deductible


text:
(a) No deduction shall be allowed for any interest paid or incurred by a taxpayer during the taxable year with respect to its corporate acquisition indebtedness to the extent that such interest exceeds—

(1) Five million dollars ($5,000,000), reduced by

(2) The amount of interest paid or incurred by such corporation during such year on obligations (A) issued after December 31, 1967, to provide consideration for an acquisition described in paragraph (1) of subdivision (b), but (B) which are not corporate acquisition indebtedness.

(b) For purposes of this section, the term “corporate acquisition indebtedness” means any obligation evidenced by a bond, debenture, note, or certificate or other evidence of indebtedness issued after October 9, 1969, by a corporation (hereinafter in this section referred to as “issuing corporation”) if—

(1) Such obligation is issued to provide consideration for the acquisition of—

(A) Stock in another corporation (hereinafter in this section referred to as “acquired corporation”), or

(B) Assets of another corporation (hereinafter in this section referred to as “acquired corporation”) pursuant to a plan under which at least two-thirds (in value) of all the assets (excluding money) used in trades and businesses carried on by such corporation are acquired,

(2) Such obligation is either—

(A) Subordinated to the claims of trade creditors of the issuing corporation generally, or

(B) Expressly subordinated in right of payment to the payment of any substantial amount of unsecured indebtedness, whether outstanding or subsequently issued, of the issuing corporation,

(3) The bond or other evidence of indebtedness is either—

(A) Convertible directly or indirectly into stock of the issuing corporation, or

(B) Part of an investment unit or other arrangement which includes, in addition to such bond or other evidence of indebtedness, an option to acquire, directly or indirectly, stock in the issuing corporation, and

(4) As of a day determined under paragraph (1) of subdivision (c) either—

(A) The ratio of debt to equity (as defined in paragraph (2) of subdivision (c)) of the issuing corporation exceeds 2 to 1, or

(B) The projected earnings (as defined in paragraph (3) of subdivision (c)), do not exceed three times the annual interest to be paid or incurred (determined under paragraph (4) of subdivision (c)).

(c) For purposes of paragraph (4) of subdivision (b)—

(1) Determinations are to be made as of the last day of any taxable year of the issuing corporation in which it issues any obligation to provide consideration for an acquisition described in paragraph (1) of subdivision (b) of stock in, or assets of, the acquired corporation.

(2) The term “ratio of debt to equity” means the ratio which the total indebtedness of the issuing corporation bears to the sum of its money and all its other assets (in an amount equal to their adjusted basis for determining gain) less such total indebtedness.

(3) (A) The term “projected earnings” means the “average annual earnings” (as defined in subparagraph (B)) of—

(i) The issuing corporation only, if cause (ii) does not apply, or

(ii) Both the issuing corporation and the acquired corporation, in any case where the issuing corporation has acquired control (as defined in Section 24564), or has acquired substantially all of the properties of the acquired corporation.

(B) The average annual earnings referred to in subparagraph (A) is, for any corporation, the amount of its earnings and profits for any three-year period ending with the last day of a taxable year of the issuing corporation described in paragraph (1), computed without reduction for—

(i) Interest paid or incurred,

(ii) Depreciation or amortization allowed under this part,

(iii) Liability for tax under this part, and

(iv) Distributions to which Section 301(c)(1) of the Internal Revenue Code, relating to property distributions, applies (other than such distributions from the acquired to the issuing corporation), and reduced to an annual average for such three-year period pursuant to regulations prescribed by the Franchise Tax Board. Such regulations shall include rules for cases where any corporation was not in existence for all of such three-year period or such period includes only a portion of a taxable year of any corporation.

(4) The term “annual interest to be paid or incurred” means—

(A) If subparagraph (B) does not apply, the annual interest to be paid or incurred by the issuing corporation only, determined by reference to its total indebtedness outstanding, or

(B) If projected earnings are determined under clause (ii) of subparagraph (A) of paragraph (3), the annual interest to be paid or incurred by both the issuing corporation and the acquired corporation, determined by reference to their combined total indebtedness outstanding.

(5) With respect to any corporation which is a bank or is primarily engaged in a lending or finance business—(A) In determining under paragraph (2) the ratio of debt to equity of such corporation (or of the affiliated group of which such corporation is a member), the total indebtedness of such corporation (and the assets of such corporation) shall be reduced by an amount equal to the total indebtedness owed to such corporation which arises out of the banking business of such corporation, or out of the lending or finance business of such corporation, as the case may be;(B) In determining under paragraph (4) the annual interest to be paid or incurred by such corporation (or by the issuing and acquired corporations referred to in subparagraph (B) of paragraph (4) or by the affiliated group of which such corporation is a member) the amount of such interest (determined without regard to this paragraph) shall be reduced by an amount which bears the same ratio to the amount of such interest as the amount of the reduction for the taxable year under subparagraph (A) bears to the total indebtedness of such corporation; and(C) In determining under subparagraph (B) of paragraph (3), the average annual earnings, the amount of the earnings and profits for the three-year period shall be reduced by the sum of the reductions under subparagraph (B) for such period.For purposes of this paragraph, the term “lending or finance business” means a business of making loans or purchasing or discounting accounts receivable, notes, or installment obligations.

(d) In applying this section—

(1) The deduction of interest on any obligation shall not be disallowed under subdivision (a) before the first taxable year of the issuing corporation as of the last day of which the application of either subparagraph (A) or subparagraph (B) of paragraph (4) of subdivision (b) results in such obligation being corporate acquisition indebtedness.

(2) Except as provided in paragraphs (3), (4), and (5), if an obligation is determined to be corporate acquisition indebtedness as of the last day of any taxable year of the issuing corporation, it shall be corporate acquisition indebtedness for such taxable year and all subsequent taxable years.

(3) If an obligation is determined to be corporate acquisition indebtedness as of the close of a taxable year of the issuing corporation in which clause (i) of subparagraph (A) of paragraph (3) of subdivision (c) applied, but would not be corporate acquisition indebtedness if the determination were made as of the close of the first taxable year of such corporation thereafter in which clause (ii) of subparagraph (A) of paragraph (3) of subdivision (c) could apply, such obligation shall be considered not to be corporate acquisition indebtedness for such later taxable year and all taxable years thereafter.

(4) If an obligation which has been determined to be corporate acquisition indebtedness for any taxable year would not be such indebtedness for each of any three consecutive taxable years thereafter if paragraph (4) of subdivision (b) were applied as of the close of each of such three years, then such obligation shall not be corporate acquisition indebtedness for all taxable years after such three consecutive taxable years.

(5) In the case of obligations issued to provide consideration for the acquisition of stock in another corporation, such obligations shall be corporate acquisition indebtedness for a taxable year only if the issuing corporation owns 5 percent or more of the total combined voting power of all classes of stock entitled to vote of such other corporation.

(e) An acquisition of stock of a corporation of which the issuing corporation is in control (as defined in Section 24564) in a transaction in which gain or loss is not recognized shall be deemed an acquisition described in paragraph (1) of subdivision (b) only if immediately before such transaction (1) the acquired corporation was in existence, and (2) the issuing corporation was not in control (as defined in Section 24564) of such corporation.

(f) For purposes of this section, the term “corporate acquisition indebtedness” does not include any indebtedness issued to any person to provide consideration for the acquisition of stock in, or assets of, any foreign corporation substantially all of the income of which, for the three-year period ending with the date of such acquisition or for such part of such period as the foreign corporation was in existence, is from sources without the United States.

(g) In any case in which the issuing corporation is a member of an affiliated group, the application of this section shall be determined, pursuant to regulations prescribed by the Franchise Tax Board, by treating all of the members of the affiliated group in the aggregate as the issuing corporation, except that the ratio of debt to equity of, projected earnings of, and annual interest to be paid or incurred by any corporation (other than the issuing corporation determined without regard to this subdivision) shall be included in the determinations required under subparagraphs (A) and (B) of paragraph (4) of subdivision (b) as of any day only if such corporation is a member of the affiliated group on such day, and, in determining projected earnings of such corporation under paragraph (3) of subdivision (c), there shall be taken into account only the earnings and profits of such corporation for the period during which it was a member of the affiliated group. For purposes of this section, the term “affiliated group” has the meaning assigned to such term by Section 1504 of the Internal Revenue Code except that all corporations other than the acquired corporation shall be treated as includable corporations and the acquired corporation shall not be treated as an includable corporation.

(h) For purposes of this section—

(1) Any extension, renewal, or refinancing of an obligation evidencing a preexisting indebtedness shall not be deemed to be the issuance of a new obligation.

(2) Any obligation which is corporate acquisition indebtedness of the issuing corporation is also corporate acquisition indebtedness of any corporation which becomes liable for such obligation as guarantor, endorser, or indemnitor or which assumes liability for such obligation in any transaction.

(i) No inference shall be drawn from any provision in this section that any instrument designated as a bond, debenture, note, or certificate or other evidence of indebtedness by its issuer represents an obligation or indebtedness of such issuer in applying any other provision of this part.

(j) This section shall apply to the determination of the allowability of the deduction of interest paid or incurred with respect to indebtedness incurred after December 31, 1970.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 169. Effective January 1, 2001.)

article: 3. Items Not Deductible


text:
(a) No deduction shall be allowed to the issuing corporation for any premium paid or incurred upon the repurchase of a bond, debenture, note, or certificate or other evidence of indebtedness which is convertible into the stock of the issuing corporation, or a corporation in the same parent-subsidiary controlled group, within the meaning of Section 1563(a)(1) of the Internal Revenue Code, relating to parent-subsidiary controlled group, as the issuing corporation, to the extent the repurchase price exceeds an amount equal to the adjusted issue price plus a normal call premium on bonds or other evidences of indebtedness which are not convertible. The preceding sentence shall not apply to the extent that the corporation can demonstrate to the satisfaction of the Franchise Tax Board that such excess is attributable to the cost of borrowing and is not attributable to the conversion feature.

(b) For purposes of subdivision (a), the adjusted issue price is the issue price, as defined in Sections 1273(b) and 1274 of the Internal Revenue Code, increased by any amount of discount deducted before repurchase, or, in the case of bonds or other evidences of indebtedness issued after February 28, 1913, decreased by any amount of premium included in gross income before repurchase by the issuing corporation.

(c) The provisions of this section shall not apply to a convertible bond or other convertible evidence of indebtedness repurchased pursuant to a binding obligation incurred on or before April 22, 1969, to repurchase such bond or other evidence of indebtedness at a specified call premium, but no inference shall be drawn from the fact that this section does not apply to the repurchase of such convertible bond or other convertible evidence of indebtedness.

(d) The amendments made to this section by the act adding this subdivision shall apply to repurchases on or after January 1, 2015.

history: (History: Amended by Stats. 2015, Ch. 359, Sec. 33. (AB 154) Effective September 30, 2015. Applicable to taxable years beginning on or after January 1, 2015, as provided in Sec. 41 of Stats. 2015, Ch. 359.)

article: 3. Items Not Deductible


text:
(a) Section 280C(b) of the Internal Revenue Code, relating to credit for qualified clinical testing expenses for certain drugs, shall apply, except as otherwise provided.

(b) (1) Section 280C(c) of the Internal Revenue Code, relating to credit for increasing research activities, shall apply, except as otherwise provided.

(2) The amendments made by Section 13206(d)(2)(A) of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97) to Section 280C(c) of the Internal Revenue Code, relating to credit for increasing research activities, shall not apply, except as otherwise provided.

(3) Section 280C(c)(2)(B) of the Internal Revenue Code, as enacted pursuant to Section 13206(d)(2)(A) of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97), is modified to refer to Section 23151, 23186, or 23802 in lieu of Section 11(b) of the Internal Revenue Code.

history: (History: Amended by Stats. 2025, Ch. 231, Sec. 102. (SB 711) Effective October 1, 2025.)

article: 3. Items Not Deductible


text: In computing net income no deduction shall be allowed for (a) abandonment fees paid in respect of property on which the open-space easement is terminated under Section 51061 or 51093 of the Government Code or (b) tax recoupment fees paid under Section 51142 of the Government Code.

history: (History: Amended by Stats. 1977, Ch. 853.)

article: 3. Items Not Deductible


text:
In the case of the demolition of any structure—

(1) No deduction otherwise allowable under this part shall be allowed to the owner or lessee of such structure for—

(A) Any amount expended for such demolition, or

(B) Any loss sustained on account of such demolition; and

(2) Amounts described in paragraph (1) shall be treated as property chargeable to capital account with respect to the land on which the demolished structure was located.

history: (History: Amended by Stats. 1985, Ch. 1461, Sec. 114. Effective October 1, 1985.)

article: 3. Items Not Deductible


text: Section 280H of the Internal Revenue Code, relating to limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years, shall apply to taxable years beginning on or after January 1, 1989, except as otherwise provided.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 170. Effective January 1, 2001.)

article: 3. Items Not Deductible


text: Section 274 of the Internal Revenue Code, relating to the disallowance of certain entertainment, gift, travel, etc., expenses, shall apply, except as otherwise provided.

history: (History: Amended by Stats. 2002, Ch. 35, Sec. 53. Effective May 8, 2002.)

article: 3. Items Not Deductible


text: The Franchise Tax Board may disallow a deduction under this part to an individual or entity for amounts paid as remuneration for personal services if that individual or entity fails to report the payments required under Section 13050 of the Unemployment Insurance Code or Section 18631 on the date prescribed therefor (determined with regard to any extension of time for filing).

history: (History: Amended by Stats. 2007, Ch. 156, Sec. 3. Effective January 1, 2008.)

article: 3. Items Not Deductible


text:
(a) Notwithstanding any other provisions in this part, in the case of a taxpayer who owns real property and has either failed to provide the information required pursuant to Section 18642 or has provided information which is either false, misleading, or incomplete in the information return required pursuant to Section 18642, no deduction for interest, taxes, depreciation, or amortization under Section 24343, 24344, 24345, 24349, or 24354.2 shall be allowed which relate to that real property, as provided in subdivision (b).

(b) No deduction shall be allowed for the items provided in subdivision (a) from 60 days after the due date for filing the information return required pursuant to Section 18642 until the date the Franchise Tax Board determines that all provisions of Section 18642 have been complied with.

(c) In the event the period of noncompliance does not cover an entire taxable year, the deductions shall be denied at the rate of one-twelfth for each full month during the period of noncompliance.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 171. Effective January 1, 2001.)

article: 3. Items Not Deductible


text:
(a) Section 291 of the Internal Revenue Code, relating to special rules relating to corporate preference items, shall apply, except as otherwise provided.

(b) The reference in Section 291(b)(1) of the Internal Revenue Code to “Section 263(c)” shall be modified to mean the deduction under Section 24423 of this part.

history: (History: Amended by Stats. 2002, Ch. 488, Sec. 12. Effective September 12, 2002.)

article: 3. Items Not Deductible


text: Subchapter C of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to corporate distributions and adjustments, shall apply, except as otherwise provided.

history: (History: Amended by Stats. 1993, Ch. 873, Sec. 40. Effective October 6, 1993.)

path: 2. OTHER TAXES > 11. CORPORATION TAX LAW > 8. Corporate Distributions and Adjustments


text:
(a) Notwithstanding paragraph (3) of subdivision (e) of Section 23051.5, if an election has been made by a taxpayer under Section 338 of the Internal Revenue Code, relating to certain stock purchases treated as asset acquisitions, or where a taxpayer is deemed to have made an election under Section 338(e) of the Internal Revenue Code, relating to deemed election where purchasing corporation acquires asset of target corporation, for federal income tax purposes, a separate election shall not be allowed under this part and the federal election shall be binding for purposes of this part, Part 10 (commencing with Section 17001), and Part 10.2 (commencing with Section 18401).

(b) Notwithstanding paragraph (3) of subdivision (e) of Section 23051.5, if an election has not been made by a taxpayer under Section 338 of the Internal Revenue Code, relating to certain stock purchases treated as asset acquisitions, or where a taxpayer has not been deemed to have made an election under Section 338(e) of the Internal Revenue Code, relating to deemed election where purchasing corporation acquires asset of target corporation, for federal income tax purposes, the taxpayer shall not make a separate state election with respect to Section 338 of the Internal Revenue Code, relating to certain stock purchases treated as asset acquisitions, under this part.

(c) This section shall apply to acquisitions made on or after the effective date of this section, except as provided in subdivision (d).

(d) This section shall not apply in the case of an acquisition that is subject to a binding contract entered into before the effective date of this section and which remains binding at all times after that date.

history: (History: Added by Stats. 2019, Ch. 39, Sec. 28. (AB 91) Effective July 1, 2019.)

chapter: 8. Corporate Distributions and Adjustments


text: Section 301(e)(2) of the Internal Revenue Code, relating to 20 percent corporate shareholders, is modified to refer to Section 24402 in lieu of Sections 243, 244, and 245 of the Internal Revenue Code.

history: (History: Added by Stats. 1991, Ch. 117, Sec. 82. Effective July 16, 1991.)


text: Section 302(c)(2) of the Internal Revenue Code, relating to determining termination of interest, is modified to refer to the periods of limitation provided in “Chapter 4 (commencing with Section 19001) and Chapter 5 (commencing with Section 19201) of Part 10.2,” in lieu of “Sections 6501 and 6502” of the Internal Revenue Code and to refer to “taxes imposed under the Personal Income Tax Law” and the “Corporation Tax Law,” in lieu of “Federal income tax.”

history: (History: Amended by Stats. 2001, Ch. 543, Sec. 38. Effective January 1, 2002.)


text: Section 304(b)(5)(B) of the Internal Revenue Code, relating to special rule in case of foreign acquiring corporation, shall apply to acquisitions on or after January 1, 2015.

history: (History: Added by Stats. 2015, Ch. 359, Sec. 35. (AB 154) Effective September 30, 2015. Applicable to taxable years beginning on or after January 1, 2015, as provided in Sec. 41 of Stats. 2015, Ch. 359.)


text: The amendments to Section 367(a) of the Internal Revenue Code as enacted by Section 14102 of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97), relating to repeal of the exception for transfers of certain property used in the active conduct of a trade or business, shall not apply.

history: (History: Added by Stats. 2025, Ch. 231, Sec. 103. (SB 711) Effective October 1, 2025.)


text:
(a) The Franchise Tax Board may include in the gross income of the taxpayer (or a member of the taxpayer’s combined reporting group) in that taxable year the taxpayer’s pro rata share (or the pro rata share of a member of the taxpayer’s combined reporting group) of any of those insurers’ current earnings and profits in that taxable year, but not to exceed an amount equal to the specific insurer’s net income attributable to investment income for that year minus that insurer’s net written premiums received in that same taxable year, if all of the following apply:

(1) For any taxable year an insurer is a member of a taxpayer’s commonly controlled group.

(2) The ratio of the five-year average net written premiums to the five-year average total income of all insurers in the commonly controlled group is equal to or less than 0.10 (or, for taxable years beginning on or after January 1, 2008, 0.15).

(3) The accumulation of earnings and profits of the insurers in the commonly controlled group had a substantial purpose of avoidance of taxes on, according to, or measured by income, of this state or any other state.

The amount so included shall be treated as a dividend received from an insurance company during the taxable year, and to the extent applicable, Section 24410 shall apply to that amount.

(b) If the insurer members of the commonly controlled group constitute a predominantly captive insurance group (as defined in paragraph (6) of subdivision (e)), then the ratio described in subdivision (a) shall be 0.40.

(c) To the extent that amounts are included in the gross income of a taxpayer (or a member of the taxpayer’s combined reporting group) pursuant to subdivision (a), those amounts shall not again be considered as investment income in the application of the ratio described in paragraph (2) of subdivision (a).

(d) The amounts included in gross income under subdivision (a) shall not again be included in gross income when subsequent distributions are made to the taxpayer (or a member of the taxpayer’s combined reporting group), or another taxpayer that acquires an interest in the stock of the taxpayer (or a member of the taxpayer’s combined reporting group with respect to which subdivision (a) was applied), or any successor or assign of the respective taxpayers (or a member of the taxpayer’s combined reporting group) described in this subdivision. For purposes of applying this subdivision, distributions from an insurer shall be considered first made from amounts included under subdivision (a).

(e) For purposes of this section, the following definitions shall apply:

(1) Except as otherwise provided, the phrases “net written premiums,” “five-year average net written premiums” and the “five-year average total income” shall each have the same meaning, respectively, as applicable for purposes of subdivision (c) of Section 24410, whether or not a dividend is actually received from any insurer member of the taxpayer’s commonly controlled group in that taxable year.

(2) “Net income attributable to investment income” means net income of the insurer multiplied by a ratio, the numerator of which is the insurer’s gross investment income from interest, dividends (other than dividends from members of the taxpayer’s commonly controlled group), rent, and realized gains or losses, and the denominator of which is the insurer’s gross income (other than dividends from members of the taxpayer’s commonly controlled group) from all sources. In the application of the preceding sentence, if an insurer is required to file a Statutory Annual Statement pursuant to the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners, “net income” means net income required to be reported in the insurer’s Statutory Annual Statement.

(3) An insurer is any insurer within the meaning of Section 28 of Article XIII of the California Constitution, whether or not the insurer is engaged in business in California.

(4) The phrase “commonly controlled group” shall have the same meaning as that phrase has under Section 25105.

(5) The phrase “combined reporting group” means those corporations whose income is required to be included in the same combined report pursuant to Section 25101 or 25110.

(6) A “predominantly captive insurance group” means the insurer members of a commonly controlled group where the insurers receive more than 50 percent of their net written premiums (without regard to the weighting factors in paragraph (1) of subdivision (e) of Section 24410) from members of the commonly controlled group or the ratios in clause (i) or clause (ii) of subparagraph (B) of paragraph (1) of subdivision (d) of Section 24410 is greater than 50 percent. The provisions of paragraph (4) of subdivision (d) of Section 24410 shall apply for purposes of this paragraph.

(7) (A) The taxpayer’s “pro rata share” of the current earnings and profits of an insurer member of a commonly controlled group is the amount that would have been received as a dividend by the taxpayer (or a member of the taxpayer’s combined reporting group) if both of the following apply:

(i) The insurer had directly distributed its current earnings and profits with respect to its stock held by the taxpayer (or member of the taxpayer’s combined reporting group).

(ii) In the case of an insurer holding the stock of another insurer, all other insurer members of the taxpayer’s commonly controlled group had distributed the same current earnings and profits with respect to their stock, in the same taxable year, until amounts were received as a dividend by the taxpayer (or a member of the taxpayer’s combined reporting group) from an insurer member of the commonly controlled group.

(B) In the application of this section, amounts treated as a dividend received by a partnership shall be considered a dividend received by each partner that is a member of the commonly controlled group, either directly or through a series of tiered partnerships.

(f) The Franchise Tax Board may prescribe those regulations that are appropriate to describe conditions under which the accumulation of earnings and profits of those insurers described in paragraph (2) of subdivision (a) do not have the substantial purpose of avoidance of taxes on, according to, or measured by income, of this state or any other state.

(g) If this section or any portion of this section is held invalid, or the application of this section to any person or circumstance is held invalid, that invalidity shall not affect other provisions of the act adding this section, or the provisions of this section that are severable.

history: (History: Added by renumbering Section 24900 by Stats. 2013, Ch. 76, Sec. 190. (AB 383) Effective January 1, 2014.)


text: Section 306(f) of the Internal Revenue Code, relating to source of gain, shall not apply.


text: Section 312(k)(3)(B)(ii) of the Internal Revenue Code, relating to special rule for real estate investment trusts, shall not apply.

history: (History: Added by Stats. 2025, Ch. 231, Sec. 104. (SB 711) Effective October 1, 2025.)


text: Internal Revenue Service Notice 2008-83, 2008-42 I.R.B. 905, issued on October 20, 2008, relating to the treatment of deductions under Section 382(h) of the Internal Revenue Code following an ownership change, shall not be applicable for purposes of taxes imposed under Part 11 (commencing with Section 23001) of Division 2, of this code with respect to any ownership change occurring at any time.

history: (History: Added by Stats. 2009, Ch. 401, Sec. 1. (AB 11) Effective October 11, 2009.)


text:
(a) Section 382(n) of the Internal Revenue Code, relating to special rule for certain ownership changes, shall not apply.

(b) Section 382(d)(3) of the Internal Revenue Code, relating to application to carryforward of disallowed interest, shall not apply.

(c) The amendments made by Section 13301(b)(3) of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97) to Section 382(k)(1) of the Internal Revenue Code, relating to loss corporation, shall not apply.

history: (History: Amended by Stats. 2025, Ch. 231, Sec. 105. (SB 711) Effective October 1, 2025. Applicable to taxable years beginning on or after January 1, 2015, as provided in Sec. 41 of Stats. 2015, Ch. 359.)


text:
(a) For purposes of this part, the provisions of Section 633 of Public Law 99-514, relating to effective dates for recognition of gain and loss on distributions of property in liquidation, shall apply except as otherwise provided.

(b) The provisions of Section 633(e) of Public Law 99-514, relating to other transition rules, shall not apply.

(c) The amendments to Section 633 of Public Law 99-514 made by Section 1006(g)(1) to 1006(g)(8), inclusive, of Public Law 100-647, relating to effective dates for recognition of gain and loss on distributions of property in liquidation, are declaratory of existing law and shall be applied in the same manner and for the same periods as specified in Public Law 100-647.


text:
(a) (1) If, in connection with any exchange described in Section 332, 351, 354, 356, or 361 of the Internal Revenue Code, a taxpayer transfers property to an insurer, the insurer shall not, for purposes of determining the extent to which gain shall be recognized on that transfer, be considered to be a corporation for purposes of this part.

(2) Paragraph (1) shall not apply to any of the following types of transactions, unless that transaction has the effect (directly or indirectly) of transferring appreciated property from a taxpayer subject to tax under this part (or a member of the taxpayer’s combined reporting group) to an insurer:

(A) An exchange or transfer pursuant to Section 368(a)(2)(D) or Section 368(a)(2)(E) of the Internal Revenue Code.

(B) A transfer of stock in an 80 percent-owned insurer for the purpose of filing a consolidated tax return or for financial or regulatory reporting.

(C) A transfer or exchange of publicly owned stock of the parent corporation.

(3) If a transaction described in paragraph (2) would qualify under that paragraph but for the fact that the transaction has the effect (directly or indirectly) of transferring appreciated property from a taxpayer subject to tax under this part (or a member of the taxpayer’s combined reporting group) to an insurer, then, if the property is used in the active trade or business of the insurer, subdivision (b) shall be deemed to apply to that transfer.

(4) For purposes of this subdivision, “appreciated property” means property whose fair market value, as of the date of the transfer subject to this section, exceeds its adjusted basis as of that date.

(b) (1) Except as provided in subdivision (c), or as otherwise provided by regulations prescribed by the Franchise Tax Board, if property subject to paragraph (1) of subdivision (a) or to subdivision (g) is transferred to an insurer for use in the active conduct of a trade or business of the insurer, then any gain otherwise required to be recognized under that subdivision shall be deferred until the date that the property is no longer owned by an insurer in the taxpayer’s commonly controlled group (or a member of the taxpayer’s combined reporting group), or the property is no longer used in the active conduct of the insurer’s trade or business (or the trade or business of another member in the taxpayer’s combined reporting group), or the holder of the property is no longer held by an insurer in the commonly controlled group of the transferor (or a member of the taxpayer’s combined reporting group).

(2) Any of the events described in paragraph (1) shall be treated as a disposition of the property under this subdivision, irrespective of whether any other provision in this part or in the Internal Revenue Code would otherwise permit nonrecognition treatment of the transaction described in this subdivision.

(3) Notwithstanding paragraph (2) of this subdivision, an insurer that becomes a member of the taxpayer’s commonly controlled group or a corporation that becomes a member of the taxpayer’s combined reporting group, as a result of a transaction of which a transfer referred to in this subdivision is a part, shall be treated as a member of the taxpayer’s commonly controlled group or a member of the taxpayer’s combined reporting group at the time of the transfer for purposes of this subdivision.

(4) For purposes of this subdivision, stock of an insurance subsidiary constitutes property used in the active trade or business of the insurer.

(5) If the deferred gain required to be taken into account under this subdivision is business income (as defined by subdivision (a) of Section 25120), the gain shall be apportioned using the apportionment percentage for the taxable year that the gain is required to be taken into account under this subdivision. Except as provided in regulations under Section 25137, for purposes of the sales factor for that taxable year, the transaction giving rise to that gain shall be treated as a sale occurring in the taxable year the gain is taken into account. The amount of any gain required to be recognized under this subdivision upon any disposition described in this subdivision shall not exceed the lesser of the deferred gain or the gain realized in the transaction in which gain is required to be recognized under this subdivision.

(6) For purposes of computing the amount of gain required to be recognized under this subdivision, appropriate adjustments may be made, pursuant to regulations issued by the Franchise Tax Board, to the basis of stock to reflect the disallowance of any expenses under paragraph (2) of subdivision (b) of Section 24425.

(c) The Franchise Tax Board may prescribe regulations providing for an annual reporting requirement in the form of a statement or other form, to be attached to the transferor taxpayer’s return, regarding the current ownership of any property for which any gains were previously deferred pursuant to subdivision (b). If the transferor taxpayer fails to provide any information required by the Franchise Tax Board pursuant to the preceding sentence, the Franchise Tax Board may, in lieu of the year described by subdivision (b), require that the transferor taxpayer take those gains into account in the first taxable year in which the current ownership of the property is not reported. The preceding sentence shall not apply so long as the property is still owned by the transferee and the failure to provide the information was due to reasonable cause and not willful neglect. Notwithstanding any other provision of law, if a taxpayer fails to satisfy the reporting requirements of this subdivision, then a notice of proposed deficiency assessment resulting from adjustments attributable to gains previously deferred pursuant to subdivision (b) with respect to which the reporting requirements were not satisfied may be mailed to the taxpayer within four years from the date on which the reporting requirements are satisfied by the taxpayer.

(d) Subdivision (b) shall not apply to any property described by Section 367(a)(3)(B) of the Internal Revenue Code as it read on January 1, 2015.

(e) Except as provided by regulations prescribed by the Franchise Tax Board, a transfer by a taxpayer of an interest in a partnership to an insurer in a transaction described in subdivision (a) shall be treated as a transfer to that insurer of the taxpayer’s pro rata share of the assets of the partnership.

(f) For purposes of this section, any distribution described by Section 355 of the Internal Revenue Code (or so much of Section 356 of the Internal Revenue Code as it relates to Section 355 of the Internal Revenue Code) shall be treated as an exchange under this section, whether or not the distribution is an exchange. This subdivision shall not apply to any distribution in which either of the following applies:

(1) The distributing corporation is an insurer.

(2) The distributee is a person other than an insurer.

(g) For purposes of this part, any transfer of property to an insurer as a contribution to capital of that insurer by one or more persons who, immediately after the transfer, own (within the meaning of Section 318 of the Internal Revenue Code) stock possessing at least 80 percent of the total combined voting power of all classes of stock of that insurer that are entitled to vote shall be treated as an exchange of that property for stock of the insurer equal in value to the fair market value of the property transferred.

(h) (1) In the case of any distribution described in Section 355 of the Internal Revenue Code (or so much of Section 356 of the Internal Revenue Code as it relates to Section 355 of the Internal Revenue Code) by a taxpayer to an insurer, to the extent provided in regulations prescribed by the Franchise Tax Board, gain shall be recognized under principles similar to the principles of this section.

(2) In the case of any liquidation to which Section 332 of the Internal Revenue Code applies, except as provided in regulations prescribed by the Franchise Tax Board, both of the following shall apply:

(A) Sections 337(a) and 337(b)(1) of the Internal Revenue Code shall not apply, where the 80-percent distributee is an insurer.

(B) Where the distributor is an insurer, the distributee shall treat the distribution as a distribution from the insurer’s earnings and profits, to the extent thereof.

(3) For purposes of the preceding paragraph, the deemed distribution from earnings and profits shall be treated as a dividend eligible for a deduction, to the extent otherwise provided in Section 24410, as if actually distributed as a dividend.

(i) For purposes of this section, the following definitions shall apply:

(1) An insurer is any insurer within the meaning of Section 28 of Article XIII of the California Constitution, whether or not the insurer is engaged in business in California.

(2) The phrase “commonly controlled group” shall have the same meaning as that phrase has under Section 25105.

(3) The phrase “combined reporting group” means those corporations whose income is required to be included in the same combined report pursuant to Section 25101 or 25110.

(j) The Franchise Tax Board may prescribe any regulations that may be appropriate to carry out the purpose of this section, which purpose is to prevent the removal of gain inherent in property at the time of a transfer from taxation under this part. Those regulations may provide for appropriate adjustments to the amount of deferred income described in subdivision (b) to avoid the double inclusion of income for situations, including but not limited to, the property transferred to an insurer member of the commonly controlled group is later acquired by a noninsurer member of the taxpayer’s combined reporting group.

(k) Upon an adequate showing by a taxpayer that a transaction referred to in subdivision (a) or (h) would not violate the purposes of this section to prevent the removal of gain inherent in property at the time of a transfer from taxation under this part, the Franchise Tax Board may grant relief from the application of this section. In an appeal filed with the State Board of Equalization, or an action filed under Section 19382 or 19385, the State Board of Equalization or the court, as the case may be, shall have jurisdiction to grant that relief only upon a specific finding that the transfer did not remove gain inherent in property at the time of transfer from taxation under this part.

(l) This section applies to transactions entered into on or after June 23, 2004, or transactions entered into after June 23, 2004, pursuant to a binding written contract in existence on June 23, 2004. For purposes of this subdivision, transactions entered into on or after June 23, 2004, that were given final approval by a regulatory insurance commissioner before June 23, 2004, shall be considered a transaction entered into before June 23, 2004, pursuant to a binding written contract in existence on June 23, 2004.

history: (History: Amended by Stats. 2025, Ch. 231, Sec. 107. (SB 711) Effective October 1, 2025.)


text: Section 381(c) of the Internal Revenue Code, relating to items of the distributor or transferor corporation, is modified to provide that, in lieu of paragraph (24), relating to credit under Section 38, and paragraph (25), relating to credit under Section 53, the acquiring corporation shall take into account (to the extent proper to carry out the purposes of Section 381 of the Internal Revenue Code) the items required to be taken into account for purposes of each credit allowable under this part with respect to the distributor or transferor corporation.

history: (History: Repealed and added by Stats. 1991, Ch. 117, Sec. 82. Effective July 16, 1991.)


text: Section 381(c)(20) of the Internal Revenue Code, relating to carryforward of disallowed business interest, shall not apply.

history: (History: Added by Stats. 2025, Ch. 231, Sec. 108. (SB 711) Effective October 1, 2025.)


text: The amendments to Section 382 of the Internal Revenue Code made by Section 13226 of the Revenue Reconciliation Act of 1993 (P.L. 103-66), relating to modifications of discharge of indebtedness provisions, shall apply to discharges occurring on or after January 1, 1996, in taxable years beginning on or after January 1, 1996.

history: (History: Amended by Stats. 2001, Ch. 543, Sec. 39. Effective January 1, 2002.)


text:
Notwithstanding any other provision of law, the contribution or other transfer of the assets of a mutual water company established prior to September 26, 1977, that is tax exempt under Section 501(c)(12) of the Internal Revenue Code, but is a taxable entity under California Law, including its lands, easements, rights, and obligations to act as sole agent of the stockholders in exercising the riparian rights of the stockholders, and rights relating to the ownership, operation, and maintenance of a water system and facilities serving the customers of the company, to a community services district formed pursuant to Part 1 (commencing with Section 61100) of Division 3 of Title 6 of the Government Code, is not a transfer subject to taxes imposed by this part if all of the following requirements are met:

(a) The consideration for the transfer of all or substantially all of the assets is the assumption by the district of the company’s liability to provide service to the company’s stockholders.

(b) The legal or beneficial title to all or substantially all of the company’s assets is vested in the district on or before January 1, 2008.

(c) For the one-year period immediately prior to commencement of the transfer and continuing until the transfer is completed, 85 percent or more of the company’s income consists of amounts collected from stockholders for the sole purpose of meeting losses and expenses.

history: (History: Added by Stats. 2002, Ch. 1108, Sec. 1. Effective September 29, 2002.)


text: Section 383 of the Internal Revenue Code, relating to special limitations on certain excess credits, etc., is modified to apply to credits allowable under Chapter 3.5 (commencing with Section 23601), and the minimum tax credit allowable under Section 23453.


text:
(a) Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to deferred compensation, etc., shall apply, except as otherwise provided.

(b) Notwithstanding the date specified in paragraph (1) of subdivision (a) of Section 23051.5, Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to pension, profitsharing, stock bonus plans, etc., and Part III of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to rules relating to minimum funding standards and benefit limitations, shall apply, except as otherwise provided, without regard to taxable year to the same extent as applicable for federal income tax purposes.

history: (History: Amended by Stats. 2025, Ch. 231, Sec. 109. (SB 711) Effective October 1, 2025.)

chapter: 12. Deferred Compensation, Etc.

path: 2. OTHER TAXES > 11. CORPORATION TAX LAW > 12. Deferred Compensation, Etc. > 1. Adoption of Subchapter D of the Internal Revenue Code Relating to Deferred Compensation, etc.


text:
(a) In addition to the application of Part II (commencing with Section 421) of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to certain stock options, paragraphs (1), (2), and (3) of Section 421(a) of the Internal Revenue Code shall also apply to any California qualified stock option that is granted to an individual whose earned income from the corporation granting the California qualified stock option for the taxable year in which that option is exercised does not exceed forty thousand dollars ($40,000). In the event that the option does not meet the necessary qualifications, the option shall be treated as a nonqualified stock option.

(b) For purposes of this section, “California qualified stock option” means a stock option that is issued and exercised pursuant to this section and that is designated by the corporation issuing the option as a California qualified stock option at the time the option is granted.

(c) (1) This section shall apply only to those stock options that are issued on or after January 1, 1997, and before January 1, 2002, by a corporation to its employee and are exercised by the employee, while employed by the corporation that issued those stock options (or within three months thereof, or within one year thereof if permanently and totally disabled as defined in Section 22(e)(3) of the Internal Revenue Code), during the taxable year with respect to any class of shares, or combination thereof, issued by the corporation, to the extent that the number of shares transferable by the exercise of the options does not exceed a total of 1,000 and have a combined fair market value of less than one hundred thousand dollars ($100,000). The combined fair market value of any stock shall be determined as of the time the option with respect to that stock is granted.

(2) Paragraph (1) shall be applied by taking options into account in the order in which they were granted.

(d) In the case of a California qualified stock option, no amount shall be included in the gross income of the employee until the time of the disposition of the option (or the stock acquired upon exercise of the option). No deduction shall be allowed under Section 162 of the Internal Revenue Code to the employer on the grant or exercise of a California qualified stock option.

(e) Subdivision (d) shall not apply to any stock option for which an election has been made under Section 83(b) of the Internal Revenue Code, relating to election to include in gross income in year of transfer.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 172. Effective January 1, 2001.)

article: 1. Adoption of Subchapter D of the Internal Revenue Code Relating to Deferred Compensation, etc.


text:
(a) Section 404(k) of the Internal Revenue Code, relating to dividends paid deduction, shall apply to taxable years beginning on or after January 1, 1995.

(b) For taxable years beginning on or after January 1, 1998, Section 404(a)(9) of the Internal Revenue Code, relating to certain contributions to employee ownership plans, is modified to provide that Section 404(a)(9) of the Internal Revenue Code shall not apply to an “S corporation.”

(c) For taxable years beginning on or after January l, 1998, Section 404(k)(1) of the Internal Revenue Code, relating to deduction for dividends on certain employer securities, is modified to provide that the phrase “a corporation” shall read “a C corporation.”

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 173. Effective January 1, 2001.)

path: 2. OTHER TAXES > 11. CORPORATION TAX LAW > 12. Deferred Compensation, Etc. > 2. Exceptions to Part I of Subchapter D of the Internal Revenue Code, Relating to Pension, Profit-Sharing, Stock Bonus Plans, etc.


text: Sections 413(b)(6) and 413(c)(5) of the Internal Revenue Code, relating to liability for funding tax, shall not apply.

history: (History: Added by Stats. 1992, Ch. 698, Sec. 22. Effective September 15, 1992.)

article: 2. Exceptions to Part I of Subchapter D of the Internal Revenue Code, Relating to Pension, Profit-Sharing, Stock Bonus Plans, etc.


text:
(a) (1) For taxable years beginning prior to January 1, 2000, income shall be computed on the basis of the taxpayer’s income year.

(2) For taxable years beginning on or after January 1, 2000 (other than the first taxable year beginning on or after that date), income shall be computed on the basis of the taxpayer’s taxable year.

(3) As provided in paragraph (1) of subdivision (f) of Section 23151, paragraph (1) of subdivision (f) of Section 23181, and paragraph (1) of subdivision (c) of Section 23183, for the first taxable year beginning on or after January 1, 2000, income shall be computed on the basis of both the preceding income year and the current taxable year.

(b) For purposes of this part, the term “income year” or “taxable year” (as applicable) means—

(1) The taxpayer’s annual accounting period, if it is a calendar year or a fiscal year;

(2) The calendar year, if subsection (g) applies; or

(3) The period for which the return is made, if a return is made for a period of less than 12 months.

(c) For purposes of this part, the term “annual accounting period” means the annual period on the basis of which the taxpayer regularly computes its income in keeping its books.

(d) For purposes of this part, the term “calendar year” means a period of 12 months ending on December 31st.

(e) For purposes of this part, the term “fiscal year” means a period of 12 months ending on the last day of any month other than December. In the case of any taxpayer who has made the election provided by subsection (f), the term means the annual period (varying from 52 to 53 weeks) so elected.

(f) (1) A taxpayer who, in keeping its books, regularly computes its income on the basis of an annual period which varies from 52 to 53 weeks and ends always on the same day of the week and ends always—(A) On whatever date such same day of the week last occurs in a calendar month, or(B) On whatever date such same day of the week falls which is nearest to the last day of a calendar month,may (in accordance with the regulations prescribed under paragraph (3)) elect to compute its income for purposes of this part on the basis of such annual period. This paragraph shall apply to taxable years ending after December 31, 1954.

(2) (A) In any case in which the effective date or the applicability of any provision of this part is expressed in terms of taxable years beginning or ending with reference to a specified date which is the first or last day of a month, a taxable year described in paragraph (1) shall be treated—

(i) As beginning with the first day of the calendar month beginning nearest to the first day of such taxable year, or

(ii) As ending with the last day of the calendar month ending nearest to the last day of such taxable year, as the case may be.

(B) In the case of a change from or to a taxable year described in paragraph (1)—

(i) If such change results in a short period (within the meaning of Section 24634) of 359 days or more, or less than seven days, Section 24636 shall not apply;

(ii) If such change results in a short period of less than seven days, such short period shall, for purposes of this part, be added to and deemed a part of the following taxable year; and

(iii) If such change results in a short period to which Section 24634 applies, the income for such short period shall be placed on an annual basis for purposes of such subsection by multiplying such income by 365 and dividing the result by the number of days in a short period, and the tax shall be the same part of the tax computed on the annual basis as the number of days in the short period is of 365 days.

(3) The Franchise Tax Board shall prescribe such regulations as it deems necessary for the application of this subsection.

(g) Except as provided in Section 24634 (relating to returns for periods of less than 12 months), the taxpayer’s taxable year shall be the calendar year if—

(1) The taxpayer keeps no books;

(2) The taxpayer does not have an annual accounting period; or

(3) The taxpayer has an annual accounting period, but such period does not qualify as a fiscal year.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 174. Effective January 1, 2001.)

article: 1. Accounting Periods

path: 2. OTHER TAXES > 11. CORPORATION TAX LAW > 13. Accounting Periods and Methods of Accounting > 1. Accounting Periods


text: The taxable year of a taxpayer may not be different than the taxable year used for purposes of the Internal Revenue Code, unless initiated or approved by the Franchise Tax Board, or otherwise required under Section 24634.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 175. Effective January 1, 2001.)

chapter: 13. Accounting Periods and Methods of Accounting

article: 1. Accounting Periods


text: If a taxpayer changes its annual accounting period, the new accounting period shall become the taxpayer’s taxable year only if the change is approved by the Franchise Tax Board. For purposes of this part, if a taxpayer to whom Section 24631(g) applies adopts an annual accounting period (as defined in Section 24631(c)) other than a calendar year, the taxpayer shall be treated as having changed its annual accounting period.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 176. Effective January 1, 2001.)

article: 1. Accounting Periods


text:
(a) In the case of any “S corporation” or personal service corporation required to change its accounting period by the federal Tax Reform Act of 1986 (Public Law 99-514) as modified by Section 10206 of Public Law 100-203 and Section 1008(e) of Public Law 100-647, that change shall be treated as initiated by the “S corporation” or personal service corporation with the consent of the Franchise Tax Board.

(b) With respect to any beneficiary, partner, or shareholder which is required to include the items from more than one taxable year of the trust, partnership, or corporation in any one taxable year, any income in excess of expenses for the short taxable year resulting from the change described in subdivision (a) or subdivision (a) of Section 17551.5 shall be taken into account ratably in each of the first four taxable years beginning after December 31, 1986, unless the beneficiary, partner, or shareholder elects to include all that income in the beneficiary’s, partner’s, or shareholder’s taxable year with or within which the trust’s, partnership’s, or corporation’s short taxable year ends.

(c) The spreading of income over four years, as allowed by subdivision (b), shall not apply unless the taxpayer receives similar treatment for federal income tax purposes.

(d) For taxable years beginning on or after January 1, 1987, each of the following shall apply:

(1) The adjusted basis of any partner’s interest in a partnership or shareholder’s stock in an “S corporation” shall be determined as if all of the income to be taken into account ratably in the four taxable years referred to in subdivision (b) were included in gross income for the first of those taxable years.

(2) If any interest in a partnership or stock in an “S corporation” is disposed of before the last taxable year in the spread period, all amounts which would be included in the gross income of the partner or shareholder for subsequent taxable years in the spread period under subdivision (b) and attributable to the interest or stock disposed of shall be included in gross income for the taxable year in which the disposition occurs. For purposes of the preceding sentence, the term “spread period” means the period consisting of the four taxable years referred to in subdivision (b).

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 177. Effective January 1, 2001.)

article: 1. Accounting Periods


text:
(a) A return for a period of less than 12 months (referred to in this article as “short period”) shall be made under any of the following circumstances:

(1) When the taxpayer, with the approval of the Franchise Tax Board, changes its annual accounting period. In such a case, the return shall be made for the short period beginning on the day after the close of the former taxable year and ending at the close of the day before the day designated as the first day of the new taxable year.

(2) When the taxpayer is in existence during only part of what would otherwise be its taxable year, except if the taxpayer’s existence terminates as a result of a reorganization described in Section 368(a)(1)(F) of the Internal Revenue Code.

(3) When the Franchise Tax Board terminates the taxpayer’s taxable year under Sections 19081 and 19082 (relating to tax in jeopardy).

(4) When the taxpayer is required to make a federal return for a period of less than 12 months.

(b) This section shall apply whether or not a federal return is required to be filed for a period of less than 12 months.

(c) If a return is required to be filed under this section for a period of less than 12 months, that period shall be deemed to be a taxable year.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 178. Effective January 1, 2001.)

article: 1. Accounting Periods


text:
(a) If a separate return is made by a taxpayer subject to the tax imposed by Chapter 2, under Section 24634 on account of a change in the accounting period the net income, computed on the basis of the period for which the separate return is made, referred to in this section as “the short period,” shall be placed on an annual basis by multiplying the amount thereof by 12, and dividing by the number of months in the short period. The Franchise Tax Board shall compute the amount of a tax on the income placed on such annual basis, and shall allow the offset provided for in Article 3 of Chapter 2, from such tax. The tax due under this section, which shall not be subject of offset, shall be such part of the tax, less the offset allowed, computed on such annual basis as the number of months in the short period is of 12 months.

(b) If a taxpayer subject to the tax imposed by Chapter 2 establishes the amount of its net income for the period of 12 months beginning with the first day of the short period, computed as if such 12-month period were a taxable year, under the law applicable to such year, then the tax for the short period shall be reduced to an amount which is such part of the tax computed on the net income for such 12-month period as the net income computed on the basis of the short period is of the net income for the 12-month period. The taxpayer (other than a taxpayer to which the next sentence applies) shall compute the tax and file its return without the application of this section. If the taxpayer has disposed of substantially all its assets prior to the end of such 12-month period, then in lieu of the net income for such 12-month period there shall be used for the purposes of this section the net income for the 12-month period ending with the last day of the short period. The tax computed under this section shall in no case be less than the tax computed on the net income for the short period without placing such net income on an annual basis. The benefits of this section shall not be allowed unless the taxpayer, at such time as regulations prescribed hereunder require (but not after the time prescribed for the filing of the return for the first taxable year which ends on or after 12 months after the beginning of the short period), makes application therefor in accordance with such regulations. Such application, in case the return was filed without regard to this section, shall be considered a claim for credit or refund with respect to the amount by which the tax is reduced under this section. The Franchise Tax Board shall prescribe such regulations as it may deem necessary for the application of this section.

(c) In the case of a taxpayer required to file a short period return pursuant to Section 24634, the alternative minimum tax shall be determined in accordance with Section 443(d) of the Internal Revenue Code.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 179. Effective January 1, 2001.)

article: 1. Accounting Periods


text: For taxable years beginning on or after January 1, 1987, Section 444 of the Internal Revenue Code, relating to election of taxable year other than required taxable year, shall be applicable, except that Section 444(c)(1), relating to effect of election, shall not apply.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 180. Effective January 1, 2001.)

article: 1. Accounting Periods


text:
(a) Income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes its income in keeping its books.

(b) If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of income shall be made under such method as, in the opinion of the Franchise Tax Board, does clearly reflect income.

(c) Subject to subdivisions (a) and (b) and Section 24654, a taxpayer may compute income under any of the following methods of accounting—

(1) The cash receipts and disbursements method;

(2) An accrual method;

(3) Any other method permitted by this part; or

(4) Any combination of the foregoing methods permitted under regulations prescribed by the Franchise Tax Board.

(d) A taxpayer engaged in more than one trade or business may in computing income, use a different method of accounting for each trade or business.

(e) Except as otherwise expressly provided in this part, a taxpayer who changes the method of accounting on the basis of which it regularly computes its income in keeping its books shall, before computing its income under the new method, secure the consent of the Franchise Tax Board.

(f) If the taxpayer does not file with the Franchise Tax Board a request to change the method of accounting, the absence of the consent of the Franchise Tax Board to a change in the method of accounting shall not be taken into account for either of the following:

(1) To prevent the imposition of any penalty, or the addition of any amount to tax, under this part.

(2) To diminish the amount of that penalty or addition to tax.

history: (History: Amended by Stats. 1987, Ch. 1139, Sec. 159. Effective September 25, 1987. Applicable to income years beginning on or after January 1, 1987, by Sec. 241 of Ch. 1139.)

article: 2. Methods of Accounting

path: 2. OTHER TAXES > 11. CORPORATION TAX LAW > 13. Accounting Periods and Methods of Accounting > 2. Methods of Accounting


text:
(a) Section 447 of the Internal Revenue Code, relating to method of accounting for corporations engaged in farming, shall apply, except as otherwise provided.

(b) (1) For taxable years beginning on or after January 1, 2019, the amendments made by Section 13102(a) of the Tax Cuts and Jobs Act (Public Law 115-97) to Section 447 of the Internal Revenue Code, relating to method of accounting for corporations engaged in farming, shall apply, except as otherwise provided.

(2) (A) Any change in method of accounting made pursuant to this subdivision shall be treated for purposes of applying Section 24721, as initiated by the taxpayer and made with the consent of the Franchise Tax Board.

(B) Section 13102(e)(1) of the Tax Cuts and Jobs Act (Public Law 115-97) does not apply to this subdivision.

(C) Notwithstanding subparagraph (B), a taxpayer may elect to apply the provisions of this subdivision to taxable years beginning on or after January 1, 2018, and before January 1, 2019.

history: (History: Amended by Stats. 2019, Ch. 39, Sec. 29. (AB 91) Effective July 1, 2019.)

article: 2. Methods of Accounting


text:
(a) (1) Section 447(i)(3) of the Internal Revenue Code, relating to reduction in account if farming business contracts, shall not apply.

(2) Section 447(i)(4) of the Internal Revenue Code, relating to income inclusions, shall not apply.

(3) (A) No suspense account may be established under Section 447(i) of the Internal Revenue Code, relating to suspense account for family corporations, by any corporation required by Section 447 of the Internal Revenue Code, relating to method of accounting for corporations engaged in farming, to change its method of accounting for any income year ending after June 8, 1997.

(B) (i) Each suspense account under Section 447(i) of the Internal Revenue Code shall be reduced (but not below zero) for each income year beginning after June 8, 1997, by an amount equal to the lesser of:

(I) The applicable portion of the account.

(II) Fifty percent of the net income of the corporation for the income year, or, if the corporation has no net income for that year, the amount of any net operating loss (as defined in Section 172 of the Internal Revenue Code and as modified for purposes of this part) for that income year.

For purposes of the preceding sentence, the amount of net income and net operating loss shall be determined without regard to this paragraph.

(ii) The amount of the applicable portion for any income year shall be reduced (but not below zero) by the amount of any reduction required for the income year under any other provision of Section 447(i) of the Internal Revenue Code.

(iii) Any reduction in a suspense account under this paragraph shall be included in gross income for the income year of the reduction.

(C) For purposes of subparagraph (B), the term “applicable portion” means, for any income year, the amount which would ratably reduce the amount in the account (after taking into account prior reductions) to zero over the period consisting of that income year and the remaining income years in those first 20 income years.

(D) Any amount in the account as of the close of that 20th year referred to in subparagraph (C) shall be treated as the applicable portion for each succeeding year thereafter to the extent not reduced under this paragraph for any prior income year after the 20th year.

(b) This section shall apply to income years ending on or after December 31, 1997.

(c) This section shall not apply to income years beginning on or after January 1, 1998.

history: (History: Amended (as added by Stats. 1998, Ch. 7) by Stats. 1998, Ch. 322, Sec. 89. Effective August 20, 1998.)

article: 2. Methods of Accounting


text:
(a) For taxable years beginning on or after January 1, 2019, amendments made by Section 13102(e)(2) of the Tax Cuts and Jobs Act (Public Law 115-97), relating to preservation of suspense account rules with respect to any existing suspense accounts, shall apply to any suspense account existing as of the effective date of the act adding this subdivision that was not otherwise precluded by Section 24652.5.

(b) (1) Any change in method of accounting made pursuant to this section shall be treated for purposes of applying Section 24721, as initiated by the taxpayer and made with the consent of the Franchise Tax Board.

(2) Section 13102(e)(1) of the Tax Cuts and Jobs Act (Public Law 115-97) does not apply to this section.

(3) Notwithstanding paragraph (2), a taxpayer may elect to apply the provisions of this section to suspense accounts established before the effective date of the act adding this section.

history: (History: Added by Stats. 2019, Ch. 39, Sec. 30. (AB 91) Effective July 1, 2019.)

article: 2. Methods of Accounting


text:
(a) Section 448 of the Internal Revenue Code, relating to limitation on use of cash method of accounting, shall apply, except as otherwise provided.

(b) For purposes of applying Section 448 of the Internal Revenue Code, Sections 801(d)(2), 801(d)(3), and 801(d)(5) of the Tax Reform Act of 1986 (Public Law 99-514), as modified by Section 1008(a) of Public Law 100-647, shall apply to each taxable year beginning on or after January 1, 1987.

(c) (1) For taxable years beginning on or after January 1, 2019, the amendments made by Section 13102(a) of the Tax Cuts and Jobs Act (Public Law 115-97) to Section 448 of the Internal Revenue Code, relating to limitation on use of cash method of accounting, shall apply, except as otherwise provided.

(2) (A) Any change in method of accounting made pursuant to this subdivision shall be treated for purposes of applying Section 24721, as initiated by the taxpayer and made with the consent of the Franchise Tax Board.

(B) Section 13102(e)(1) of the Tax Cuts and Jobs Act (Public Law 115-97) does not apply to this subdivision.

(C) Notwithstanding subparagraph (B), a taxpayer may elect to apply the provisions of this subdivision to taxable years beginning on or after January 1, 2018, and before January 1, 2019.

history: (History: Amended by Stats. 2019, Ch. 39, Sec. 31. (AB 91) Effective July 1, 2019.)

article: 2. Methods of Accounting


text: Section 451 of the Internal Revenue Code, relating to the general rule for taxable year of inclusion, shall apply, except as otherwise provided.

history: (History: Amended by Stats. 1994, Ch. 1243, Sec. 66. Effective September 30, 1994.)

article: 3. Year of Inclusion

path: 2. OTHER TAXES > 11. CORPORATION TAX LAW > 13. Accounting Periods and Methods of Accounting > 3. Year of Inclusion


text:
(a) (1) The options under Sections 112(d)(2) and 112(d)(3) of the Federal Agriculture Improvement and Reform Act of 1996 (7 U.S.C. Sec. 7212(d)(2) and (3)), as in effect on October 12, 1998, shall be disregarded in determining the taxable year for which any payment under a production flexibility contract under Subtitle B of Title I of that act (as so in effect) is properly includable in gross income for purposes of this part, Part 10 (commencing with Section 17001), or Part 10.2 (commencing with Section 18401).

(2) In order to provide farmers with the same tax treatment for all payments in years beginning before January 1, 2002, with respect to production flexibility contract payments as provided under federal law as modified by Public Law 105-277, this subdivision shall apply to taxable years ending after December 31, 1995.

(b) Any option to accelerate the receipt of any payment under a production flexibility contract entered into on or after January 1, 2002, that is payable under the Federal Agriculture Improvement and Reform Act of 1996 (7 U.S.C. Sec. 7200 et seq.) as in effect on December 17, 1999, shall be disregarded in determining the taxable year for which that payment is properly includable in gross income for purposes of this part, Part 10 (commencing with Section 17001), or Part 10.2 (commencing with Section 18401).

history: (History: Added by Stats. 2002, Ch. 35, Sec. 54. Effective May 8, 2002.)

article: 3. Year of Inclusion


text: Section 451(b) of the Internal Revenue Code, relating to inclusion not later than for financial accounting purposes, shall not apply to specified credit card fees, as defined in Treasury Regulations Section 1.451-3(j)(2).

history: (History: Added by Stats. 2025, Ch. 231, Sec. 110. (SB 711) Effective October 1, 2025.)

article: 3. Year of Inclusion


text: Section 451(g)(3) of the Internal Revenue Code, relating to special election rule, is modified by substituting the phrase “subdivision (b) of Section 24949.1” in lieu of the phrase “section 1033(e)(2)” contained therein.

history: (History: Amended by Stats. 2025, Ch. 231, Sec. 111. (SB 711) Effective October 1, 2025.)

article: 3. Year of Inclusion


text: Section 451(k) of the Internal Revenue Code, relating to special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy, shall not apply.

history: (History: Amended by Stats. 2025, Ch. 231, Sec. 112. (SB 711) Effective October 1, 2025.)

article: 3. Year of Inclusion


text:
(a) (1) Sections 453, 453A, and 453B of the Internal Revenue Code, relating to installment method, special rules for nondealers, and gain or loss on disposition of installment obligations, respectively, shall apply, except as otherwise provided.

(2) Sections 811(c)(4), 811(c)(6), and 811(c)(7) of Public Law 99-514, as modified by Section 1008(f) of Public Law 100-647, shall apply to each taxable year beginning on or after January 1, 1988.

(3) Section 812 of Public Law 99-514, relating to the disallowance of use of the installment method for certain obligations, as modified by Section 1008(g) of Public Law 100-647, shall apply to each taxable year beginning on or after January 1, 1988.

(b) For purposes of subdivision (a), any references in the Internal Revenue Code to sections that have not been incorporated into this part by reference shall be deemed to refer to the corresponding section, if any, of this part.

(c) In the case of any taxpayer who made sales under a revolving credit plan and was on the installment method under former Section 24667 or 24668 for the taxpayer’s last taxable year beginning before January 1, 1988, the provisions of this section shall be treated as a change in method of accounting for the first taxable year beginning after December 31, 1987, and all of the following shall apply:

(1) That change shall be treated as initiated by taxpayer.

(2) That change shall be treated as having been made with the consent of the Franchise Tax Board.

(3) The period for taking into account adjustments under Article 6 (commencing with Section 24721) by reason of that change shall not exceed four years.

(d) The repeal of Section 453C of the Internal Revenue Code by Section 10202(a) of Public Law 100-203, relating to repeal of the proportionate disallowance of the installment method, shall apply to dispositions on or after January 1, 1990, in taxable years beginning on or after January 1, 1990.

(e) (1) In the case of any installment obligations to which Section 453(l)(2)(B) of the Internal Revenue Code applies, in lieu of the provisions of Section 453(l)(3)(A) of the Internal Revenue Code, the “tax” (as defined by subdivision (a) of Section 23036) for any taxable year for which payment is received on that obligation shall be increased by the amount of interest determined in the manner provided under Section 453(l)(3)(B) of the Internal Revenue Code.

(2) Sections 10202 and 10204 of Public Law 100-203, are modified to provide for each of the following:

(A) Section 10202 shall apply to dispositions in taxable years beginning on or after January 1, 1990.

(B) Section 10204 shall apply to costs incurred in taxable years beginning on or after January 1, 1990.

(C) Any adjustments required by Section 481 of the Internal Revenue Code shall be included in gross income as follows:

(i) Fifty percent in the first taxable year beginning on or after January 1, 1990.

(ii) Fifty percent in the second taxable year beginning on or after January 1, 1990.

(f) (1) The amendments to Section 453A of the Internal Revenue Code made by Section 2004 of Public Law 100-647, relating to special rules for nondealers, shall apply to each taxable year beginning on or after January 1, 1990.

(2) In the case of any installment obligation to which Section 453A of the Internal Revenue Code applies and which is outstanding as of the close of the taxable year, in lieu of the provisions of Section 453A(c)(1) of the Internal Revenue Code, the “tax” (as defined by subdivision (a) of Section 23036) for the taxable year shall be increased by the amount of interest determined in the manner provided under Section 453A(c)(2) of the Internal Revenue Code.

(3) The provisions of Section 453A(c)(3)(B) of the Internal Revenue Code, relating to the maximum rate used in calculating the deferred tax liability, are modified to refer to the maximum rate of tax imposed under Section 23151, 23186, or 23802, whichever applies, in lieu of the maximum rate of tax imposed under Section 1 or 11 of the Internal Revenue Code.

history: (History: Amended by Stats. 2002, Ch. 807, Sec. 19. Effective September 23, 2002.)

article: 3. Year of Inclusion


text: Any taxpayer who disposes of property as a result of the exercise of the power of requisition or condemnation may, at his or her election, have the income derived from that disposition taken into account pursuant to Section 24667, if the taxpayer and the acquiring entity have, in conformity with Section 1263.015 of the Code of Civil Procedure or Section 15854.1 of the Government Code, contracted for the payment of compensation for the acquisition in a manner which satisfies the requirements of Section 24667.

history: (History: Added by Stats. 1982, Ch. 1368, Sec. 4.)

article: 3. Year of Inclusion


text: The amendments to Section 453B(e) of the Internal Revenue Code as enacted by Section 13512(b)(1) of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97), relating to the repeal of the small life insurance company deduction, shall not apply.

history: (History: Added by Stats. 2025, Ch. 231, Sec. 113. (SB 711) Effective October 1, 2025.)

article: 3. Year of Inclusion


text:
(a) Where a taxpayer reports income arising from the sale or other disposition of property as provided in this article, and the entire income therefrom has not been reported prior to the year that the taxpayer ceases to be subject to the tax imposed by Chapter 2 (commencing with Section 23101) or Chapter 3 (commencing with Section 23501), the unreported income shall be included in the measure of the tax for the last year in which the taxpayer is subject to the tax imposed by Chapter 2 (commencing with Section 23101) or Chapter 3 (commencing with Section 23501).

(b) Subdivision (a) shall not be applicable where the installment obligation is transferred pursuant to a reorganization (as defined in Section 368(a) of the Internal Revenue Code) to another taxpayer that is a party to the reorganization (as defined in Section 368(b) of the Internal Revenue Code) subject to tax under the same chapter as the transferor, or is transferred to any exempt nonprofit cemetery corporation as defined in Section 23701c of this code.

(c) The determination of any deficiency resulting from this section shall be made under Article 3 (commencing with Section 19032) of Chapter 4 of Part 10.2, but the period of limitation under that article, and the accrual of interest under Article 6 (commencing with Section 19101) of Chapter 4 of Part 10.2, shall commence on the date the taxpayer ceases to be subject to the tax imposed by Chapter 2 (commencing with Section 23101) or Chapter 3 (commencing with Section 23501).

history: (History: Amended by Stats. 1996, Ch. 952, Sec. 51. Effective January 1, 1997.)

article: 3. Year of Inclusion


text: Where a corporation subject to the tax imposed by Chapter 2 is engaged in the performance of a contract in this State which will require more than a year to complete, the Franchise Tax Board may require that the income from the contract be reported on the basis of percentage of completion unless the corporation furnishes bond or other security guaranteeing the payment of a tax measured by the income received on the completion of the contract even though the corporation is not doing business in this State in the year subsequent to the year of completion.

history: (History: Added by Stats. 1955, Ch. 938.)

article: 3. Year of Inclusion


text:
(a) Section 460 of the Internal Revenue Code, relating to special rules for long-term contracts, shall apply, except as otherwise provided.

(b) (1) Section 804(d) of Public Law 99-514, relating to the effective date of modifications in the method of accounting for long-term contracts, shall apply to taxable years beginning on or after January 1, 1987.

(2) In the case of a contract entered into after February 28, 1986, during a taxable year beginning before January 1, 1987, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for the taxable year in which the contract began.

(c) (1) The amendments to Section 460 of the Internal Revenue Code made by Section 10203 of Public Law 100-203, relating to a reduction in the percentage of items taken into account under the completed contract method, shall apply to each taxable year beginning on or after January 1, 1990.

(2) In the case of a contract entered into after October 13, 1987, during a taxable year beginning before January 1, 1990, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for each taxable year beginning prior to January 1, 1990.

(d) (1) The amendments to Section 460 of the Internal Revenue Code made by Section 5041 of Public Law 100-647, relating to a reduction in the percentage of items taken into account under the completed contract method, shall apply to each taxable year beginning on or after January 1, 1990.

(2) In the case of a contract entered into after June 20, 1988, during a taxable year beginning before January 1, 1990, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for each taxable year beginning prior to January 1, 1990.

(e) (1) The amendments to Section 460 of the Internal Revenue Code made by Section 7621 of Public Law 101-239, relating to the repeal of the completed contract method of accounting for long-term contracts, shall apply to each taxable year beginning on or after January 1, 1990.

(2) In the case of a contract entered into after July 10, 1989, during a taxable year beginning on or before January 1, 1990, an adjustment to income shall be made upon completion of the contract, if necessary, to correct any underreporting or overreporting of income, for purposes of this part, resulting from differences between state and federal law for each taxable year beginning prior to January 1, 1990.

(f) For purposes of applying paragraphs (2) to (6), inclusive, of Section 460(b) of the Internal Revenue Code, relating to the look-back method, any adjustment to income computed under paragraph (2) of subdivision (b), (c), (d), or (e) shall be deemed to have been reported in the taxable year from which the adjustment arose, rather than the taxable year in which the contract was completed.

(g) (1) For contracts entered into on or after the effective date of the act adding this subdivision, the amendments made by Section 13102(d) of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97) to Section 460 of the Internal Revenue Code, relating to special rules for long-term contracts, shall apply, except as otherwise provided.

(2) For contracts entered into on or after the effective date of the act adding this subdivision, the amendments made by Section 13102(e)(3) of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97), relating to exemption from percentage completion for long-term contracts, shall apply, expect as otherwise provided.

(3) (A) Any change in method of accounting made pursuant to this paragraph shall be treated for purposes of applying Section 24721, as initiated by the taxpayer and made with the consent of the Franchise Tax Board.

(B) Section 13102(e)(1) of the Tax Cuts and Jobs Act, 2017 (Public Law 115-97) does not apply to this subdivision.

(C) Notwithstanding subparagraph (B), a taxpayer may elect to apply the provisions of this subdivision, where otherwise allowed, to contracts entered into on or after January 1, 2018, in taxable years ending after January 1, 2018.

(h) The amendments to Section 460(c)(6)(B)(ii) of the Internal Revenue Code made by Section 143(a)(2) and Section 143(b)(6)(I) of Public Law 114-113, relating to the special rule for federal long-term contracts, shall not apply.

history: (History: Amended by Stats. 2025, Ch. 231, Sec. 114. (SB 711) Effective October 1, 2025.)

article: 3. Year of Inclusion


text:
(a) If, in the case of a taxpayer owning any non-interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals the increase in the redemption price of such obligation occurring in the taxable year does not (under the method of accounting used in computing its income) constitute income to it in such year, such taxpayer may, at its election made in its return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by it and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Franchise Tax Board permits it, subject to such conditions as the Franchise Tax Board deems necessary, to change to a different method.

(b) In the case of any obligation—(1) Of the United States; or(2) Of a state, a territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia,which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 184. Effective January 1, 2001.)

article: 3. Year of Inclusion


text: If an amount representing compensatory damages is received or accrued by a taxpayer during a taxable year as the result of an award in a civil action for infringement of a patent issued by the United States, then the tax attributable to the inclusion of such amount in gross income for the taxable year shall not be greater than the aggregate of the increases in taxes which would have resulted if such amount had been included in gross income in equal installments for each month during which such infringement occurred.

history: (History: Amended by Stats. 2000, Ch. 862, Sec. 185. Effective January 1, 2001.)

article: 3. Year of Inclusion