Plain English Breakdown
The official text confirms the bill takes effect immediately as a tax levy but does not provide specific dates for implementation beyond the defined taxable years.
Changes to Corporate Tax Rules for Water's-Edge Elections
AB 1790 changes how corporations calculate state taxes by requiring the inclusion of certain foreign income and expanding which companies are included in reports starting in 2026, while ending all water's-edge elections beginning in 2028.
What This Bill Does
- Requires taxpayers using a water's-edge election to include net CFC tested income for taxable years beginning on or after January 1, 2026.
- Mandates that corporations with at least 20% of their sales in the United States be included in tax reports and apportionment factors starting in 2026, excluding banks from this specific requirement.
- Ends all existing water's-edge elections for taxable years beginning on or after January 1, 2028.
- Prohibits taxpayers from making new water's-edge elections or filing on a water's-edge basis for any year starting on or after January 1, 2028.
- Allows corporations to end their current water's-edge election without Franchise Tax Board consent between taxable years beginning in 2026 and before 2028.
Who It Names or Affects
- Corporations doing business in the state that currently use a water's-edge tax election.
- United States shareholders of controlled foreign corporations (CFCs) within these corporate groups.
- The Franchise Tax Board, which administers the corporation tax law.
Terms To Know
- Water's-edge basis
- A method for calculating state taxes that includes income from domestic operations and foreign subsidiaries with significant U.S. sales, but excludes other foreign income.
- Net CFC tested income
- Income earned by a controlled foreign corporation that federal law requires U.S. shareholders to include in their gross income.
- Apportionment factors
- The numbers used, such as sales or property location, to determine what portion of a company's total income is taxed by the state.
Limits and Unknowns
- The bill text does not specify how much additional tax revenue this change will generate.
- The effective date for general provisions other than the immediate tax levy status is tied to future taxable years starting in 2026 and 2028.