The Corporation Tax Law, in conformity with federal income tax law, generally defines “gross income” as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

Existing federal income tax law authorizes a qualifying vessel operator, as defined, to elect to determine its corporate tax burden for specified international shipping activities using a per-ton rate and provides an exclusion from gross income for qualifying shipping activities of an electing corporation or a member of an electing group, as specified.

This bill, for taxable years beginning on or after January 1, 2026, would provide an exclusion from gross income for qualifying shipping activities of an electing corporation or a member of an electing group for which an election is in effect under the above-described federal law, as specified. The bill would also provide special rules relating to depreciation and basis of a qualifying vessel, as defined, and would, in conformity with federal income tax laws, provide for the nonrecognition of gain from the disposition of a qualifying vessel where the electing corporation acquires a replacement qualifying vessel, as provided.

This bill would take effect immediately as a tax levy.

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(a) For taxable years beginning on or after January 1, 2026, gross income does not include any amount received from qualifying shipping activities by an electing corporation or a member of an electing group for which an election is in effect under Subchapter R (commencing with Section 1352) of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to election to determine corporate tax on certain international shipping activities using per ton rate.

(b) For purposes of this section, the following definitions shall apply:

(1) “Electing corporation” has the same meaning as that term is defined in Section 1355 of the Internal Revenue Code, relating to definitions and special rules.

(2) “Electing group” has the same meaning as that term is defined in Section 1355 of the Internal Revenue Code, relating to definitions and special rules.

(3) “Qualifying shipping activities” has the same meaning as defined in Section 1356 of the Internal Revenue Code, relating to qualifying shipping activities.

(4) “Qualifying vessel” has the same meaning as defined in Section 1355 of the Internal Revenue Code, relating to definitions and special rules.

(c) (1) Any item of loss, deduction, or credit, other than a deduction for interest expense, otherwise allowed under this part with respect to any activity, the income from which is excluded from gross income pursuant to this section, shall not be allowed.

(2) The interest expense of an electing corporation shall be disallowed in the same ratio as provided by Section 1357(c)(3) of the Internal Revenue Code.

(d) Notwithstanding paragraph (1) of subdivision (c), the adjusted basis of any qualifying vessel shall be determined as if the deduction for depreciation had been allowed using the straight-line method of depreciation.

(e) (1) If any qualifying vessel is sold or disposed of by an electing corporation in an otherwise taxable transaction, at the election of the corporation, no gain shall be recognized if any replacement qualifying vessel is acquired during the period specified in Section 1359(b) of the Internal Revenue Code, relating to period within which property must be replaced, except to the extent that the amount realized upon such sale or disposition exceeds the cost of the replacement qualifying vessel.

(2) In the case of any replacement qualifying vessel purchased by the electing corporation which resulted in nonrecognition of any part of the gain realized as the result of the sale or other disposition of a qualifying vessel, the basis of the replacement qualifying vessel shall be the cost of the replacement qualifying vessel decreased by the amount of the gain that would have been recognized if not for this subdivision. If the property purchased consists of more than one piece of property, the reduction in basis determined under this paragraph shall be allocated to the purchased properties in proportion to their respective costs.

This act provides for a tax levy within the meaning of Article IV of the California Constitution and shall go into immediate effect.