California conformity, or lack of it, to federal tax laws has created uncertainty for taxpayers and has increased the workload for CPAs who are forced to navigate two often-conflicting sets of laws. 

Senate Bill 711, introduced by Sen. Jerry McNerney, is the latest attempt to address this problem.

The last time California passed conformity legislation was in 2015. State law does not automatically conform to changes in federal law, with the exception of some specific retirement provisions. To conform, the California Legislature must pass a tax bill addressing conformity to a specific federal tax law or pass an omnibus bill providing conformity as of a specific date. 

Since 2015, there have been more than 1,000 changes to federal tax laws without corresponding state conformity. Senate Bill 711 would move the conformity date from Jan. 1, 2015,  to Jan. 1, 2025, while also detailing which federal provisions would receive full, partial, or non-conformity.

Highlights of Conforming Provisions

• IRC Section 1031: California would conform to IRC Section 1031, eliminating tax-deferred exchanges of property other than real property.

• Alimony deductions & taxability: California would conform to the federal law eliminating the deduction for alimony payments by payors and the taxable income inclusion of alimony payments by recipients.

• IRA catch-up contributions and increased SIMPLE IRA limits: California would conform to the deductibility of IRA catch-up contributions and increased SIMPLE-IRA contribution limits.

• IRC Section 72(p): California would allow for penalty-free retirement plan distributions for qualified disaster expenses.

Highlights of Partially Conforming Provisions

• IRC Section 41: California would conform to the use of the Alternative Simplified Credit (ASC), but California percentages would be 3 percent for qualified research expenses (QREs) that exceed 50 percent of average QREs for the three prior years or 1.3 percent if the taxpayer has no QREs in any of the previous three years. Corresponding federal percentages are 14 percent and 6 percent.

Highlights of Non-Conforming Provisions

• IRC Section 163(j): California would not conform to interest expense limitations under IRC Section 163(j).

• Renewable energy credits: California would not provide any renewable energy tax credits, as added by the federal Inflation Reduction Act of 2022.

• Miscellaneous itemized deductions: California would continue non-conformity to the federal elimination of miscellaneous itemized deductions.

• IRC Section 56A: California would not institute a corporate alternative minimum tax, as added by the federal Inflation Reduction Act of 2022.

• IRC Section 174: California would continue non-conformity to federal provisions regarding amortization of research and experimental expenditures.

• IRC Section 199A: California would continue non-conformity to the Qualified Business Income deduction.

• Casualty & disaster losses: California would continue non-conformity to federal restrictions on casualty and disaster losses.

• Mortgage interest: California would continue non-conformity to federal limitations on the deduction for qualified mortgage interest paid.

• IRC Section 280F: California would continue non-conformity to increased federal depreciation limits.

Senate Bill 711 has passed in the State Senate and is up for vote in the Assembly. The Assembly vote is expected to take place before the Sept. 12, 2025, deadline. CalCPA’s Committee on Taxation will continue to monitor the bill’s progress.