Corporations Tax Law: water’s-edge election: global intangible low-taxed income.

Plain English Breakdown

The bill summary and digest do not provide specific details on how companies will adjust taxes or receive support during transition.

Corporations Tax Law: Water's-Edge Election Changes

AB 1790 changes how corporations can report their income for taxes, requiring them to include specific foreign income and ending water’s-edge election options by January 1, 2028.

What This Bill Does

• Requires companies that use the water's-edge method to account for net CFC tested income within the water's-edge group starting from January 1, 2026.
• Changes rules about including other companies' sales data for tax purposes if those companies sell more than 20% of their products in the U.S., excluding banks.
• Ends all water’s-edge election options by January 1, 2028.
• Allows companies to end their water's-edge elections without needing approval from a specific board starting from January 1, 2026.

Who It Names or Affects

• Corporations that do business in California and use the water’s-edge method for tax reporting.

Terms To Know

Water's-Edge Basis

A way companies can choose to report their income only from within a specific area, like just inside the U.S. borders or California, instead of worldwide.

Net CFC Tested Income

Income earned by foreign corporations that are controlled by U.S. shareholders and must be included in the U.S. tax report.

Limits and Unknowns

• The bill does not specify how companies will adjust their taxes if they cannot use the water’s-edge method anymore.
• It is unclear what specific support or guidance will be provided to help companies transition away from using the water's-edge election.
• The exact impact on tax revenue and company compliance costs is uncertain.

Official Summary Text

AB 1790, as introduced, Connolly.
Corporations Tax Law: water’s-edge election: global intangible low-taxed income.
The Corporation Tax Law imposes on every corporation doing business in the state, as defined, a tax according to or measured by net income and, in the case of a corporation with income derived from or attributable to sources both within and without this state, apportions the income between this state and other states and foreign countries in accordance with a single sales formula based on the sales within and without this state, except that in the case of an apportioning trade or business that derives more than 50% of its gross business receipts from conducting one or more qualified business activities, as defined, business income is apportioned in accordance with a specified 3-factor formula. Existing federal law, for purposes of determining a taxpayer’s gross income for federal income tax purposes, requires that a person who is a United States shareholder of any controlled foreign
corporation, as defined, to include in their gross income the net CFC tested income, as provided.
The Corporation Tax Law, for taxable years beginning on or after January 1, 2003, for purposes of determining income derived from or attributable to sources within this state, allows corporations to make a statutory election as to whether their income is determined on a “water’s-edge” basis or on a worldwide unitary basis. Under existing law, the election to report income on a water’s-edge basis remains in effect until terminated, and provides conditions for the termination of the election.
This bill, for taxable years beginning on or after January 1, 2026, would require a taxpayer that files on a water’s-edge basis to account for net CFC tested income within the water’s-edge group, as provided. The bill would require a taxpayer that files on a water’s-edge basis to include all income
and apportionment factors of any corporation, other than a bank, whose sales factor, instead of the average of 3 factors, in the United States is at least 20%. The bill would also terminate all water’s-edge elections for the first taxable year beginning on or after January 1, 2028, and would not allow a taxpayer to make a water’s-edge election, or file on a water’s-edge basis, for taxable years beginning on or after January 1, 2028. The bill would authorize any taxpayer that has made a water’s-edge election to terminate that election without the consent of the Franchise Tax Board for taxable years beginning on or after January 1, 2026, and before January 1, 2028.
This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIII A of the California Constitution, and thus would require for passage the approval of
2
/
3
of the membership of each house of the Legislature.
This bill would take effect immediately as a tax levy.

Current Bill Text

Download Bill PDF