On Monday, April 12, 2010, Governor Schwarzenegger signed SB 401, which excludes from California gross income the cash grant in lieu of tax credits (the Treasury grant) pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA).

SB 401 also excludes the Treasury grant from California alternative minimum taxable income and provides that, for California income tax purposes, the basis of property with respect to which the Treasury grant is received is reduced by half the amount of the grant and is adjusted to take into account any federal basis adjustments made as a result of recapture of the grant. SB 401 applies to Treasury grants made in any taxable year, including Treasury grants made before the enactment of SB 401.

Like most states, California generally does not conform to federal law with respect to income tax credits. ARRA added the provision excluding the Treasury grant from gross income to Section 48 of the Internal Revenue Code, which historically was solely a federal credit provision that California did not incorporate for state income tax purposes. As a result, there was widespread concern that California would treat the Treasury grant as taxable income for California purposes.