California Tax Reset: SB 1435, the Film Credit Fix and Proposition 40

• SB 1435 (Chapter 236, Statutes of 2026) was chaptered on 14 September 2026. It takes effect immediately as a tax levy and applies to taxable years beginning on or after 1 January 2025.

• The federal business interest limitation under IRC § 163(j) no longer applies for California personal income tax purposes. California's Corporation Tax Law already did not conform to it.

• California's pre-TCJA alimony treatment is made permanent, but it does not reach divorce or separation instruments executed after 31 December 2025, or older instruments modified afterwards where the modification expressly adopts the change.

• SB 122, signed on 29 June 2026, extends the $5 million annual cap on business credit usage through tax years 2027 to 2029. From 2030 the cap becomes permanent at the greater of $5 million or 70% of liability.

• SB 186, signed on 19 September 2026 and effective from 2027, exempts certain independent productions from that cap and accelerates cash refunds for studios from 90% over five years to 95% over two years.

• AB 2319 creates California's first standalone post-production credit of 35% to 50%, with $10 million in startup funding.

• Proposition 40 asks voters to impose a one-time 5% tax on billionaires who were California residents on 1 January 2026. Two competing measures, Propositions 41 and 42, could void it.

SB 1435 was chaptered by the Secretary of State on 14 September 2026 as Chapter 236, Statutes of 2026. It took effect immediately as a tax levy and applies retroactively to taxable years beginning on or after 1 January 2025. Most returns for the 2025 year are therefore already governed by it.

The bill's core function is housekeeping. California references the Internal Revenue Code as of a fixed date, which is 1 January 2025 for current years. SB 1435 deletes references to repealed federal provisions and updates others to reduce confusion. Beyond that clean-up, it makes several substantive choices that advisers should note.

Business interest. For taxable years beginning on or after 1 January 2025, the IRC § 163(j) limitation on business interest deductions does not apply under the Personal Income Tax Law. The Corporation Tax Law already declined to conform. Individuals, sole proprietors and owners of pass-through entities are the main beneficiaries.

Alimony. California's adoption of IRC § 215 as it read on 1 January 2015 becomes permanent. Payors on qualifying instruments keep the deduction for state purposes. The rule does not apply to instruments executed after 31 December 2025. It also does not apply to earlier instruments modified afterwards if the modification expressly adopts the amendments. The same cut-off governs the partial deduction for nonresidents and part-year residents, which is based on the ratio of California AGI to total AGI.

Estates and trusts in divorce. The rule treating a spouse as the beneficiary under IRC § 682(a), as it read on 1 January 2015, is also made permanent, subject to the same post-2025 cut-off.

Other provisions of note:

• IRC § 197 amortization of goodwill and certain intangibles applies for both corporation and personal income tax purposes.

• IRC § 1446(f) withholding on dispositions of partnership interests does not apply for California income tax.

• The CARES Act changes to the IRC § 461(l) excess business loss rules generally do not apply for personal income tax. One exception is adopted: excess business loss is computed without regard to income, gains or deductions from performing services as an employee.

• The rule excluding the federal electing large partnership provisions is repealed.

• The IRC § 457 deferred compensation limit, tied to federal law as of 1 January 2010, is extended to taxable years beginning before 1 January 2025.

SB 122 is a budget trailer bill signed on 29 June 2026 as part of the 2026-27 budget package. It limits how much in business tax credits a single taxpayer can apply against California income or franchise tax in a year. It is a broad revenue measure that reaches credits in every sector, not only entertainment.

The cap has a two-stage design:

California has used this tool before. A $5 million limit applied for tax years 2020 to 2022 under AB 85 and again for 2024 to 2026 under SB 167. SB 122 is different because it makes the cap a standing feature of the tax code.

The legislative aim was to stop large taxpayers, particularly in technology, from wiping out their liability with research and development credits. The side effect fell on the Film and Television Tax Credit Program, which was expanded in 2025 from $330 million to $750 million a year. A studio that earns tens of millions of dollars in credits could need several years to use them under a $5 million annual ceiling. Independent producers warned that the cap would also make their credits harder to sell to financiers.

SB 186, carried by the Senate Committee on Budget and Fiscal Review, was signed on 19 September 2026 and applies from 2027. It passed both houses on the final night of the session after roughly two months of negotiation between lawmakers and industry groups. The measure was unveiled on a Friday evening and cleared the 72-hour public review rule just in time.

The Entertainment Union Coalition and the Motion Picture Association had sought a full exemption from SB 122. Legislative leaders declined, concerned that other industries would demand carve-outs of their own. The result is a targeted compromise with three main elements:

Independent film accounts for about 10% of the $750 million program. For major studios, the practical route around the cap is now the refund election, which costs a smaller discount and pays out faster. Studios that prefer to use credits against liability remain bound by the cap.

AB 2319, authored by Assemblymember Nick Schultz (D-Burbank), was signed at the Television Academy in Hollywood on 19 September 2026, the same day as SB 186. It creates a credit of 35% to 50% of qualifying in-state spending on editing, sound, music, visual effects, finishing and other post-production work.

The key legal change is eligibility. Under the existing program, post-production costs qualified only when 75% of filming or overall spending took place in California. AB 2319 removes that link, so a production shot in another state or abroad can still claim the credit for post work done in California. New York, New Jersey, Georgia and New Mexico already offer comparable incentives.

Funding is modest at launch. The budget agreement provides $10 million in startup money against the $100 million originally sought, and the author's office has said it will seek more in next year's budget. Early applicants should expect competition for a small allocation.

On 3 November 2026, Californians will vote on Proposition 40, the 2026 Billionaire Tax Act. It is a combined constitutional amendment and statute sponsored by SEIU United Healthcare Workers West. If approved, it would impose a one-time tax equal to 5% of the net worth of billionaires who were California residents on 1 January 2026.

How the tax would work

• Two snapshot dates. Residency is fixed on 1 January 2026; net worth is measured on 31 December 2026. A person resident on the first date stays in scope even after moving away.

• Base. Worldwide net worth, with real estate, pensions and retirement accounts generally excluded.

• Payment. Due in 2027, or spread over five years with a 7.5% annual charge on the unpaid balance.

• Anti-avoidance. Large charitable gifts made after 15 October 2025 may be added back to net worth, and pledges made after that date do not reduce it.

• Use of revenue. Ninety percent must go to public health care services, with the balance to food assistance and education.

• Litigation window. Facial challenges must be filed within 60 days of the election, with appeal directly to the California Supreme Court.

The revenue picture. Roughly 200 Californians are thought to exceed the $1 billion threshold. The sponsor projects about $100 billion over five years. The Legislative Analyst's Office is more cautious: it expects a temporary gain of tens of billions of dollars spread over several years, and a possible ongoing loss of under $1 billion a year in income tax as some billionaires leave.

Competing measures. Opponents have qualified Propositions 41 and 42. Each contains a clause that would void Proposition 40 entirely if it receives more votes. Proposition 41 would require pre-election audits of special-tax initiatives.

Constitutional exposure. Fixing residency at a date before the vote is the most contested design choice. Commentators expect challenges on several levels: to the tax as a whole, to the snapshot residency and valuation dates, and to its application to particular taxpayers. The outcome of that litigation is genuinely uncertain.

The 30 September Deadline

The Legislature adjourned on 31 August 2026, and Governor Newsom has until 30 September to sign or veto the bills on his desk. Under Article IV, Section 10(b)(2) of the California Constitution, a bill passed before 1 September of the session's second year becomes law if it is not returned by 30 September. This is the last signing period of Newsom's tenure, which ends in January 2027.

SB 1435, SB 186 and AB 2319 are already signed. Any further tax measures still pending will be settled by Wednesday, and the enacted list should be reviewed once the window closes.

Tax advisers and preparers. SB 1435 reaches back to 2025 returns. Recheck California business interest computations for individual and pass-through clients, since § 163(j) no longer limits the state deduction. Confirm § 197 amortization, § 461(l) loss and § 1446(f) withholding positions against the new text, and consider amended returns where 2025 filings took a different view.

Family law practitioners. The alimony rules now turn on when an instrument was executed or modified. Draft any modification of a pre-2026 order with deliberate language on whether the post-2025 regime is adopted, and advise both parties on the state tax consequence.

Corporate and in-house counsel. Model credit usage under the $5 million cap for 2027 to 2029 and the 70% alternative from 2030. Companies with large R&D or other credit balances should revisit forecasts and carryforward schedules now.

Entertainment counsel and producers. Confirm whether each project qualifies as independent for the SB 186 exemption. For studio projects, compare the 95% two-year refund with using credits against liability under the cap. Productions shooting elsewhere should price AB 2319 into post-production location decisions, while noting its limited initial funding.

Private client and family office advisers. Clients near the $1 billion threshold who were resident on 1 January 2026 should review their exposure before the 31 December 2026 valuation date. Treat charitable transfers and relocation with care, as neither may reduce the tax as drafted. Plan for both outcomes of the vote and for litigation that could follow a win.