Details of Public Law 119-21, section 70341 , One Big Beautiful Bill Act

This provision would require taxpayers to calculate their business interest deduction limitation on (1) business interest income; (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year; and (3) the floor plan financing interest of the taxpayer for the taxable year (Internal Revenue Code (IRC) section 163(j), regardless of whether the taxpayer deducts or capitalizes such business interest. In addition, the provision provides that the amount of allowable business interest deduction would be applied first to the aggregate amount to business interest that would otherwise be capitalized, and the remainder (if any) would be applied to the aggregate amount of business interest that would be deducted.

In general, any carryforward business interest allowed under this provision would not be treated as interest to which an interest capitalization provision applies. This provision adds and defines the term “interest capitalization provision” to mean any interest that is required to be charged to a capital account or may be deducted or charged to a capital account.

This provision also modifies the definition of “business interest,” for purposes of calculating the business interest limitation, to mean any interest paid or accrued on indebtedness properly allocable to a trade or business, except for investment interest or any capitalized interest. For purposes of this provision, “investment interest” is defined as any interest paid or accrued allowed as a deduction on indebtedness properly allocable to property held for investment (IRC section 163(d)). Capitalized interest includes (1) interest and carrying charges properly allocable to personal property which is part of a straddle (IRC section 263(g)) or (2) interest paid or incurred during a production period for real or tangible property produced by a taxpayer that has a long useful life, an estimated production period exceeding 2 years, or an estimated production period exceeding 1 year and estimated cost of $1,000,000 (IRC section 263A(f)).

The provision also provides that the Secretary will issue regulations or guidance as may be necessary to carry out the purpose of these provisions, including regulations or guidance to determine which business interest will be taken into account for purposes of these provisions and when determining which portion of the deduction will be allocated to related and nonrelated parties (IRC section 59A(c)(3)).

California conforms, under the Personal Income Tax Law to the federal rules for the deduction of interest under IRC section 163, as of the specified date of January 1, 2025. As a result, California does not conform to the changes made by this provision under the PITL.

Under the Corporation Tax Law (CTL), to the federal rules for the deduction of interest under IRC section 163, as of the specified date of January 1, 2025, with modifications, but does not conform to the federal limitations on deductions of business interest . As a result, California does not conform to the changes made by this provision under the CTL.

The estimated revenue impact to conform to the above provisions would result in the following gain:

26/27 27/28 28/29 29/30 $11,000,000 $9,600,000 $11,000,000 $12,000,000