On Oct. 1, 2025, Gov. Gavin Newsom signed into effect California S.B. 302, which excludes tax credit monetization transactions from the California income tax for taxable years beginning Jan. 1, 2026, and before Jan. 1, 2031.
Specifically, the bill provides that (i) payments made pursuant to Section 6418 of the Internal Revenue Code of 1986, as amended (the Code) — which includes amounts received by a transferor and the value of a credit received by a transferee, and payments made pursuant to Section 6417 of the Code — are excluded from the California income tax, and (ii) taxpayers are prohibited from deducting amounts paid for tax credits under Section 6418 of the Code from their California income tax.
Notably, S.B. 302 only considers the timing of a transfer, not the year in which tax credits are generated, in determining its applicability. Section 6418 of the Code allows taxpayers to transfer credits at any time during the taxable year in which the credits were generated until the day on which the transferor’s tax return for such taxable year is due (accounting for valid extensions). Therefore, to avoid California’s income tax on proceeds, taxpayers selling tax credits generated during their 2025 taxable year should consider waiting until their first taxable year beginning after Jan. 1, 2026, to close tax credit sale transactions.
This strategy may apply to sellers of investment tax credits, which are often sold after a project is placed in service and in the same year they are generated, and sellers of production tax credits, which may be sold periodically throughout the year as they are generated.
Tax credit sellers should take a holistic approach to determine whether waiting until 2026 to sell their credits is advantageous. The benefits of avoiding the California state income tax (with a 13.3% top individual rate and an 8.84% top corporate rate for most project developers) may be outweighed by other considerations, including cash flows, time value of money and a potential tax credit buyer’s timing needs.
In weighing these considerations, sellers should consult with their state and local income tax advisers to determine the amount of California income tax that would be levied upon a potential tax credit sale to quantify the benefit of waiting until 2026 to close a tax credit sale.
No planning considerations are needed for tax credits generated in taxable year 2025 for which a direct payment is claimed under Section 6417 of the Code. Since such payment will not occur until the taxpayer’s federal tax return is filed for its 2025 taxable year, the timing of the direct payment necessarily occurs during the taxpayer’s 2026 taxable year.