California Gov. Gavin Newsom has until Oct. 12 to sign Senate Bill 302 (SB302), a bill that would align the state’s tax treatment of green energy credits with federal law starting in 2026. SB302 would conform to federal income tax law in allowing the tax-free sale or transfer of select green energy federal tax credits for California state income tax purposes beginning on or after Jan. 1, 2026 through Dec. 31, 2030, with the law sunsetting in tax years beginning in 2031. On Sept. 11, 2025, the California Assembly unanimously passed SB302 after approval by the state Senate in May. 

Bill amended after economic study, federal changes

The federal Inflation Reduction Act includes Internal Revenue Code (IRC) Section 6418 allowing for the tax-free sale or transfer of certain green energy federal income tax credits including the IRC Section 48E clean electricity investment tax credit and the IRC Section 45X advanced manufacturing production credit for tax years beginning after Dec. 31, 2022. California was one of the states that did not automatically conform to this federal income tax provision.

The California Senate had drafted SB302 which originally conformed to IRC Section 6418 for state income tax purposes effective for tax years beginning on or after Jan. 1, 2026 applicable retroactively for tax years beginning on or after Jan. 1, 2023 opening the door to state amended tax return refund claims.

In February 2025, The Franchise Tax Board had completed an economic impact study (Study) on the revenue effect of the passage of SB302 in its original form projecting that the state would encounter a revenue loss of $280 million with a significant component related to amended return refund claims with recommendations to not enact this law retroactively to alleviate revenue loss from such filings. This Study did not take into account enactment of the federal One Big Beautiful Bill Act on July 4, 2025, curbing such tax credits being generated from solar and wind electric generating projects.

In response to the Study, SB302 was amended to take effect starting in tax years beginning on or after Jan. 1, 2026 through Dec. 31, 2030 without retroactive application of the law prior to its effective date. Since its amendment, the revised SB302 passed 38-0 in the California Senate before the recent vote by the State Assembly.

What does CohnReznick think?

Transferors of green energy tax credits who have a significant presence in California and plan to avail themselves of the federal tax-free transferability rules should consider modeling the state income tax costs of transferring such credits. This will help assess whether to postpone the transaction until the new state law takes effect.