California enacted one of its most consequential tax changes in a decade by updating its Internal Revenue Code conformity date from January 1, 2015, to January 1, 2025, through enactment of SB 711.
This change aligns California with a wide range of federal provisions enacted over the past 10 years, while preserving California-specific deviations. Notably, the state does not conform to changes enacted under the mid-2025 “One Big, Beautiful Bill Act,” underscoring California’s selective approach to federal alignment.
Key Areas of Conformity and Non-Conformity
Depreciation and Expensing
California continues to diverge from federal depreciation rules. Bonus depreciation under IRC section 168(k) remains disallowed, and the state retains its own Section 179 expensing limits—$25,000 with a $200,000 phase-out threshold—far below federal levels.
Net Operating Losses
While California generally conforms to federal NOL rules, significant limitations remain. The state continues to suspend NOL deductions for taxpayers with taxable income of $1 million or more for tax years 2024 through 2026, reducing the value of loss carryforwards for larger businesses.
Interest Deductibility and CAMT
California does not conform to the federal Section 163(j) interest limitation, allowing full interest expense deductions at the state level. The state also does not adopt the federal corporate alternative minimum tax enacted under the Inflation Reduction Act, shielding large corporations from a parallel state-level minimum tax based on book income.
Pass-Through Owners
The state continues to disallow the federal Section 199A qualified business income deduction, resulting in higher California taxable income for pass-through owners despite federal relief.
Research Credit Changes
Elimination of Alternative Incremental Research Credit
Effective January 1, 2025, California repealed its alternative incremental research credit through SB 711. Taxpayers claiming research incentives must now elect either the regular incremental credit or the alternative simplified credit, using state-specific elections and forms. The change simplifies the credit structure but requires action by taxpayers that previously relied on the repealed method, particularly those with California-centric R&D operations.
Filing Changes
Mandatory Electronic Filing Expanded
Following IRC conformity, California now requires electronic filing for a broader set of business taxpayers, including:
Corporations filing at least 10 returns of any type annually
Partnerships filing at least 10 returns or with more than 100 partners
Tax-exempt organizations with unrelated business income
The shift reflects the state’s push toward centralized compliance and audit efficiency.