California has enacted legislation updating the state’s general Internal Revenue Code (IRC) conformity date for income tax purposes from Jan. 1, 2015, to Jan. 1, 2025.1 However, California’s longstanding tradition to selectively conform to certain sections of the IRC remains in place, and the Jan. 1, 2025, conformity date does not incorporate any provisions from the recent federal enactment of the One Big Beautiful Bill Act (OBBBA).2 This Alert covers some of the more significant corporate and personal income tax provisions affected by this legislation.
Corporate income tax provisions
While the general corporate income tax conformity date with the IRC is moved to Jan. 1, 2025 for tax years beginning on and after Jan. 1, 2025,3 California’s treatment of the most significant business tax provisions contained in the IRC continues to be complex. For example, given California’s prior conformity to the IRC before the Tax Cuts and Jobs Act (TCJA) 4 and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act),5 it had not adopted the IRC Sec. 163(j) business interest expense limitation generally limiting the interest deduction to a “30% of adjusted taxable income” amount. In the legislation, California confirms that it will continue to decouple from this significant limitation imposed for federal income tax purposes prospectively, providing a benefit to corporate taxpayers.6
Another area in which corporate taxpayers will be treated more favorably in California as compared to current federal income tax treatment concerns the research and experimental (R&E) expenditure deduction contained in IRC Sec. 174. The California legislation decouples from the TCJA provisions that became effective for tax years beginning on and after Jan. 1, 2022, and as such, California continues to allow taxpayers to immediately deduct both domestic and foreign R&E expenses.7
Of course, the conformity choices that California made in the legislation will not always result in a benefit to California taxpayers. Since California historically has decoupled from depreciation provisions in IRC Sec. 168, California did not act to conform to the new federal bonus depreciation provisions in IRC Sec. 168(k). Likewise, the state decoupled from TCJA increases in the IRC Sec. 179 deduction amounts, along with elections that would be available with respect to IRC Sec. 179 that were adopted under the TCJA.8
California continues its very loose conformity to the federal net operating loss (NOL) attribute. Since California did not conform to the TCJA, the state NOL deduction has not been subject to the federal limitation of 80% of taxable income for the 2018-2025 tax years, and the state’s NOL carryforward limitation period remains at 20 years as compared to the federal policy of allowing an unlimited carryforward under the TCJA. However, California has historically acted to temporarily suspend the ability of most taxpayers to utilize the California NOL, and such restriction is currently in place for the 2024-2026 tax years, except for taxpayers with taxable income of $1 million or less.9 Given the history of the substantial differences between the California and federal NOL deductions, as expected, the California conformity legislation confirms its continuing nonconformity to the federal NOL provisions as contained in the TCJA, as well as the CARES Act.10
Other significant conformity adjustments made in the California legislation impacting the corporate income tax include the following:
- Decoupling from federal corporate alternative minimum tax changes since Jan. 1, 2015 contained in IRC Secs. 55-59.11
- Conformity to IRC Sec. 41 with respect to the alternative simplified research credit, and decoupling from the alternative incremental research credit.12
- Disallowance of deductions for the corporate stock repurchase excise tax imposed under IRC Sec. 5401 et seq.13
- Decoupling from higher depreciation thresholds relating to luxury automobiles contained in IRC Sec. 280F.14
- Continued decoupling from enhancements to the federal charitable contribution pursuant to IRC Sec. 170.15
Personal income tax provisions
Like the corporate income tax general conformity provision, the personal income tax general conformity date is moved to Jan. 1, 2025 for tax years beginning on and after Jan. 1, 2025,16 with numerous exceptions.
As far as significant deduction provisions that have changed substantially resulting from the TCJA and more recent federal legislation, California has been relatively consistent with respect to its decoupling policy for individual tax purposes. For the IRC Sec. 174 R&E expense deduction for individuals, the California legislation simply states that it conforms to IRC Sec. 174 as it read on Jan. 1, 2015.17 With respect to California’s NOLs as applied to individuals, the state decoupled from federal changes to IRC Sec. 172 in the TCJA and the CARES Act consistent with the decoupling policy for corporate NOLs.18 The state continues to decouple from numerous depreciation provisions in IRC Sec. 168, including bonus depreciation, as well as IRC Sec. 179 expensing provisions.19 The legislation also follows practically all states by formally decoupling from IRC Sec. 199A, which provides a 20% deduction for certain pass-through owners that earn qualified business income.20
Amendments made under the TCJA to IRC Sec. 274 (a limitation on the deduction by employers of fringe benefit expenses) and IRC Sec. 280F (a limitation on depreciation for luxury automobiles and a limitation where certain property is used for personal purposes), are likewise not applicable for California personal income tax purposes.21
With personal casualty losses from disasters still top of mind for many impacted by wildfires and other weather events in the state, it was not surprising to see California continue to materially decouple from the federal rules regarding the treatment of losses in federally declared disasters, as well as other material provisions in IRC Sec. 165, relating to the treatment of losses.22
One area of the law in which federal and California tax policy will become the same through this legislation is with respect to the treatment of like-kind exchanges under IRC Sec. 1031. This section allows for a deferral of gain on the sale of certain property if similar property of a like kind is purchased within a set period of time. The TCJA limited like-kind treatment in certain instances, and to the extent such property was real property held for productive use in a trade or business, the purchased property also had to be real property held for productive use in a trade or business. In California, this strict interpretation of like-kind exchanges was adopted, except for taxpayers below a $500,000 adjusted gross income threshold ($250,000 for single / married filing separate taxpayers), use of the pre-TCJA rules was required. The use of two separate sets of like-kind exchange rules proved difficult from a compliance perspective, and California’s conformity legislation now eliminates the adjusted gross income threshold, resulting in full conformity to the IRC Sec. 1031 like-kind exchange rules.23
Other significant conformity adjustments made in the California legislation impacting the personal income tax include the following:
- Decoupling from federal personal alternative minimum tax changes since Jan. 1, 2015 contained in IRC Secs. 55-59.24
- Conformity to IRC Sec. 41 with respect to the alternative simplified research credit, and decoupling from the alternative incremental research credit.25
- Decoupling from federal suspensions of the qualified bicycle commuting reimbursement exclusion under IRC Sec. 132(f)(8), qualified moving expense reimbursements under IRC Sec. 132(g)(2), and the IRC Sec. 217(k) moving expense deduction.26
- Decoupling from IRC Sec. 213(a) change in the unreimbursed medical expense deduction limitation from 7.5% to 10%.27
- Continued decoupling from enhancements to the federal charitable contribution pursuant to IRC Sec. 170.28
Commentary
After ten years in which several federal bills dramatically altered the method by which the federal income tax base is calculated, California finally adopted an IRC conformity update in response. And the legislature did so with urgency, stating that the measures were necessary to immediately go into effect “in order to provide much-needed tax relief to taxpayers in conformity with federal tax relief enacted in the last 10 years, and to alleviate administrative burdens on state tax agencies.”29 To be sure, taxpayers and the California Franchise Tax Board will find it somewhat easier from a compliance perspective to determine tax liability based on a Jan. 1, 2025 IRC conformity date. However, due to the selective nature of the changes, there will still be ample differences between the federal and California income tax base calculation that will continue to require an understanding of TCJA, and in some cases, pre-TCJA concepts.
In analyzing the California conformity legislation, it is very important to examine the provisions of the IRC that were not addressed, as well as the provisions with direct referential changes. Clearly, the Jan. 1, 2025 conformity date means that the legislation does not address the OBBBA, which was enacted on July 4, 2025. As a result, California appears poised to completely decouple from the tax measures in the OBBBA until a future legislative vehicle in which California examines the conformity issue. Notably, by not conforming to the OBBBA, California is not currently conforming to the new IRC Sec. 168(n), which provides for a full federal income tax deduction for qualified production property expenses (for qualifying property on which construction begins between Jan. 20, 2025 and Dec. 31, 2028, and which is placed in service by the end of 2030). Based on the tendency of many of the OBBBA provisions to reduce elements of the federal income tax base, it would be surprising to see California decide to adopt widespread conformity to the OBBBA in future legislation.
There was some question as to whether the international tax regime adopted under the TCJA (including the creation of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) concepts) would be incorporated by California in its conformity advancement legislation. Doing so would have resulted in significant additional revenue to the state. Ultimately, the legislature decided against adopting this regime by staying silent on these provisions by failing to incorporate IRC Sec. 951A by reference, in conjunction with California’s historic policy to decouple from IRC Subpart F (consisting of IRC Secs. 951-965).
1 Cal. S.B. 711, enacted Oct. 2, 2025.
2 P.L. 119-21 (2025).
3 Cal. Rev. & Tax. Code § 23051.5, defining the term “Internal Revenue Code” with reference to Cal. Rev. & Tax. Code § 17024.5(a)(1)(Q), which was amended to advance the IRC conformity date to Jan. 1, 2025.
4 P.L. 115-97 (2017).
5 P.L. 116-136 (2020).
6 Cal. Rev. & Tax. Code § 24344(e).
7 Cal. Rev. & Tax. Code § 24365(d).
8 Cal. Rev. & Tax. Code §§ 24356(b)(5); 24356.1(b).
9 Cal. Rev. & Tax. Code § 24416.24. For further discussion, see GT SALT Alert: California suspends NOLs, limits business credits.
10 Cal. Rev. & Tax. Code § 24416(a)(3).
11 Cal. Rev. & Tax. Code §§ 23400-23456.5.
12 Cal. Rev. & Tax. Code § 23609.
13 Cal. Rev. & Tax. Code § 24345.6.
14 Cal. Rev. & Tax. Code § 24349.1(d).
15 Cal. Rev. & Tax. Code § 24357-24358.
16 Cal. Rev. & Tax. Code § 17024.5(a)(1)(Q).
17 Cal. Rev. & Tax. Code § 17201.1(a).
18 Cal. Rev. & Tax. Code § 17276(a)(3).
19 Cal. Rev. & Tax. Code §§ 17250; 17255.
20 Cal. Rev. & Tax. Code § 17201.6
21 Cal. Rev. & Tax. Code § 17201.1(c), (d).
22 Cal. Rev. & Tax. Code § 17204.
23 Cal. Rev. & Tax. Code § 18031.5.
24 Cal. Rev. & Tax. Code § 17062.1.
25 Cal. Rev. & Tax. Code § 17052.12.
26 Cal. Rev. & Tax. Code §§ 17149.1, 17149.2, 17201.1(b).
27 Cal. Rev. & Tax. Code § 17241.
28 Cal. Rev. & Tax. Code §§ 17250.1; 17250.2.
29 S.B. 711, § 120.
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