Details of Public Law 119-21, section 70322 , One Big Beautiful Bill Act

The provision modifies the definition of DEI when computing gross income for domestic corporations under this provision.

This provision defines the term DEI to mean, with respect to any domestic corporation, the excess (if any) of the gross income of the domestic corporation without regard to certain exceptions to DEI over expenses and deductions (including taxes), other than interest expense and research or experimental expenditures, properly allocable to such gross income, subject to several exceptions. The provision also added an additional exception to DEI for any income and gain from the sale or disposition (including the deemed sale or other deemed disposition under IRC section 367(d)) of intangible property and any other property subject to depreciation, amortization, or depletion by the seller.

California does not conform to the changes to IRC section 250.

Worldwide Unitary Method

California corporate taxpayers doing business both within and without California are required to compute their California franchise or income tax using the worldwide unitary method. Under this method, a corporate taxpayer's business income from both domestic and foreign unitary operations is considered in the calculation of the taxpayer's tax base, and a share of that business income is then “apportioned” to California using a formula. Income apportioned to California is subject to California franchise or income tax. The formula measures relative levels of business activity in the state by using the amount of the taxpayer’s sales in California divided by the taxpayer's sales everywhere. This measure of activities is commonly called the “single sales-factor formula.” The amount of sales from both domestic and foreign activities are included in the calculation of the apportionment formula. Generally, dividends paid from one member to another within the unitary group from unitary earnings are eliminated from tax computations under Revenue and Taxation Code (RTC) section 25106.

California Water's-Edge Election

As an alternative to the worldwide unitary method, California law allows corporations to elect to determine the business income of their combined reporting group on a “water's-edge” basis. In general, the water’s-edge method excludes foreign corporations from the calculation of business income. An exception to this general rule is a CFC with subpart F income. The income and factors of the CFC are included in a water's-edge combined report based on the CFC's inclusion ratio. This ratio is equal to the CFC’s current year subpart F income divided by the CFC’s current year earnings and profits. While California does not conform to the subpart F scheme of the IRC, for purposes of computing the CFC's inclusion ratio under water's-edge, California incorporates the federal definitions of "subpart F income" and "earnings and profits" as applicable for federal income tax purposes for the same taxable year.

Generally, rather than computing a dividends-received deduction using federal dividends received deduction (DRD) provisions, dividends paid to the water's-edge combined reporting group from foreign affiliates are income on the water's-edge combined report and California taxpayers electing water's-edge treatment are generally entitled to a 75 percent DRD on such dividends under RTC section 24411.

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