Details of Public Law 119-21, section 70313 , One Big Beautiful Bill Act

The provision modifies the taxable income computation for the purposes of calculating the FTC limitation (Internal Revenue Code (IRC) section 904(b)) on sourcing of certain inventory produced in the United States (U.S.) and sold through foreign branches. For the purpose of this provision, if a U.S. person maintains an office or other fixed place of business in a foreign country, as determined under IRC section 864(c)(5), the portion of income from a sale or exchange outside the U.S. of inventory property that is produced in the U.S., used outside of the U.S., and derived from the purchase of inventory property within a possession of the U.S, and is attributable to that office or fixed place of business, is treated as foreign source income. The amount treated as foreign source income under this provision may not exceed 50 percent of the income from the sale or exchange of such property.

California does not conform to the sourcing rules under IRC sections 861 to 865. California exercises its taxing powers based on two jurisdictional concepts: (1) the residency of the individual, and (2) the source of the income. Residents of California pay state taxes on all income received regardless of its geographical source. Nonresidents of California are taxed by California only on income derived from sources within California’s boundaries (“source income”). Source income includes wages earned from services performed in California, gains from the disposition of property located in California, and profits from business transacted in California. Intangible income, such as investment interest, is considered to originate in the state in which the recipient resides at the time it is earned, unless it is earned in connection with a trade or business.

California does not allow a FTC and does not conform to subpart F (sections 951 to 965) of the IRC, relating to controlled foreign corporations, except to the extent applicable with respect to filings under a water’s-edge election.

As a result, California does not conform to the changes made by this provision.