Summary of Federal Income Tax Changes

IRC Section 7508A

Generally, when a tax return is timely filed, a claim for credit or refund may be filed up to three years from the date filed. Federal law (IRC section 7508A) allows certain administrative disaster tax relief, such as postponement of filing and payment deadlines, once a federal disaster is declared by the President. The postponement provisions provided under IRC 7508A did not apply to the period of time a taxpayer is allowed to file a claim for credit or refund.

IRC Section 6303

Federal law provides that taxpayers are informed of taxes due within 60 days from the date assessed. If a tax is assessed prior to the last date for payment of tax, payment of tax is not demanded until after such date.

IRC Section 7508A

Generally, when a tax return is timely filed, a claim for credit or refund may be filed up to three years from the date filed. Federal law (IRC section 7508A) allows certain administrative disaster tax relief, such as postponement of filing and payment deadlines, once a federal disaster is declared by the President. The postponement provisions provided under IRC 7508A did not apply to the period of time a taxpayer is allowed to file a claim for credit or refund.

The provision provides that for qualified taxpayers affected by federally declared disaster, significant fire, or terroristic or military actions any extension of time provided to taxpayers to file their tax return would also apply to the statute of limitations to file for a credit or claim for refund (IRC 6511).

IRC Section 6303

Federal law provides that taxpayers are informed of taxes due within 60 days from the date assessed. If a tax is assessed prior to the last date for payment of tax, payment of tax is not demanded until after such date.

The provision provides that, for qualified taxpayers affected by federally declared disaster, significant fire, or terroristic or military actions, the last date for payment of any tax will be extended by the period provided under IRC 7508A for purposes of mailing a notice and demanding tax.

California conforms to IRC 7508A, as of the specified date January 1, 2025, with modifications, relating to postponement of certain tax-related deadlines. Under California law, the Director of Finance has the authority to determine whether a taxpayer is affected by a state of emergency, and whether state tax deadlines should be postponed due to a federally declared disaster, significant fire, or a terroristic or military action disaster. California law provides impacted taxpayers with postponement of state tax-related deadlines an additional relief period, that begins on the date the state postponement period expires, if any, and ends on the date the federal postponement period expires if requested by the taxpayer.

California law does not conform to the modifications made by this section of the public law. California law provides that taxpayers can file a claim for refund four years from the earlier of the due date of the tax return or the date filed, or one year from the date of the overpayment, whichever is later.

California does not conform to the federal notice and demand for tax but has a standalone law under the Administration of Franchise and Income Tax Law.

This provision makes permanent the tax rate structure established under the Tax Cuts and Jobs Act (Public Law 115-97, section 11001) that was set to expire on December 31, 2025. For taxable year 2025, the rates are as follows:

• 10% for incomes of single individuals with incomes of $11,925 or less ($23,850 for married couples filing jointly)
• 12% for incomes over $11,925 ($23,850 for married couples filing jointly)
• 22% for incomes over $48,475 ($96,950 for married couples filing jointly)
• 24% for incomes over $103,350 ($206,700 for married couples filing jointly)
• 32% for incomes over $197,300 ($394,600 for married couples filing jointly)
• 35% for incomes over $250,525 ($501,050 for married couples filing jointly
• 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly).

The 10 percent and 12 percent tax rate brackets would be indexed for inflation using the 2016 Chained Consumer Price Index for All Urban Consumers (C–CPI–U) beginning after December 31, 2025. The remaining tax brackets would use the 2017 C-CPI-U.

The provision also makes the capital gains and losses breakpoints permanent. Therefore, in the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15 percent breakpoint, such gain is not taxed. Any adjusted net capital gain which would result in taxable income exceeding the 15 percent breakpoint but not exceeding the 20 percent breakpoint is taxed at 15 percent. The remaining adjusted net capital gain is taxed at 20 percent.

California does not conform, under PITL, to federal individual income tax rates, and instead has its own individual income tax rates that range from 1 percent to 12.3 percent. In addition, there is an additional tax of 1 percent on the portion of a taxpayer’s taxable income that exceeds $1,000,000. Thus, the maximum personal income tax rate is 13.3 percent.

California conforms, under the PITL and the CTL, to the federal rules for computing capital gains and losses, as of the specified date of January 1, 2025, with modifications. However, California does not provide special tax rates for net capital gain; instead, such gains are taxed at the same rates as ordinary income.

The provision makes permanent the increased standard deduction amounts established under the Tax Cuts and Jobs Act (Public Law 115-97, section 11021) for individuals across all filing statuses. Under the provision, the amount of the standard deduction applies to taxable years beginning after December 31, 2024, is $31,500 for married individuals filing a joint return, $23,625 for head-of-household filers, and $15,750 for all other taxpayers.

The amount of the standard deduction is indexed for inflation using the Chained Consumer Price Index for All Urban Consumers (C–CPI–U) for taxable years beginning after December 31, 2025.

California does not conform to the federal standard deduction, but instead has stand-alone law allowing a California standard deduction in lieu of the federal standard deduction, as follows:

Nonresidents and part-year residents are allowed a standard deduction in the above amounts as modified by the ratio that California AGI bears to total AGI (not to exceed 100 percent).

This provision makes permanent the repeal of the deduction for personal exemptions established under the Tax Cuts and Jobs Act (Public Law 115-97, section 11041).

Additionally, for taxable years beginning after December 31, 2024, and before January 1, 2029, this provision allows a deduction in amount equal to $6,000 for each qualified individual. The deduction is reduced for taxpayers whose modified adjusted gross income (AGI) exceeds $75,000 ($150,000 for married filing joint).

The provision defines the term “qualified individual” as the taxpayer, if the taxpayer has attained age 65 before the close of the taxable year, and in the case of a joint return, the taxpayer’s spouse, if such spouse has attained age 65 before the close of the taxable year.

To claim the senior deduction, the taxpayer must have a valid social security number (SSN) on the return for the taxable year. The omission of a valid SSN will be treated as a mathematical or clerical error. Additionally, in the case of a married individual, they must file a joint return to claim the deduction.

California does not conform to federal personal-exemption deductions. Instead of personal-exemption deductions, the PITL provides personal-exemption tax credits, including a senior exemption for individuals age 65 or older. For taxable years 2025, individual taxpayers are allowed personal-exemption tax credits in the amounts shown below:

The personal-exemption tax credits are reduced when a taxpayer’s federal AGI exceeds a threshold amount. For taxable year 2025, the exemption credits are reduced by $6 ($12 if married filing joint) for each $2,500 ($1,250 if married filing separately) of AGI or fraction thereof, that exceeds the following threshold amounts:

• Single or Married/RDP filing separate — $252,203
• Married/RDP filing joint — $504,411
• Head of Household — $378,310

Under the Administration of Franchise and Income Tax Law (AFITL), FTB treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster youth tax credit. California doesn’t conform to the definition of mathematical or clerical error under IRC section 6213. As a result, California does not conform to the changes made by this provision related to IRC section 6213.

The provision makes permanent the child tax credit modifications established under the Tax Cuts and Jobs Act (Public Law 115-97, section 11022). For taxable years beginning after December 31, 2024, the amount of child tax credit is increased to $2,200 per qualifying child. The credit is further modified to permanently provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The provision generally retains the present-law definition of dependent.

Under the provision, the maximum amount of the credit that is refundable may not exceed $1,400 per qualifying child. The maximum amount of the credit that is refundable is indexed for inflation using the Chained Consumer Price Index for All Urban Consumers (C–CPI–U) for taxable years beginning after December 31, 2024. Additionally, the provision provides that, in order to receive the child tax credit (i.e., both the refundable and non-refundable portion), a taxpayer must include a social security number (SSN) for each qualifying child for whom the credit is claimed on the tax return. For these purposes, an SSN must be issued before the due date for the filing of the return for the taxable year.

Further, the provision retains the present-law age limit for a qualifying child. Thus, a qualifying child is an individual who has not attained age 17 during the taxable year.

Finally, the provision makes permanent the modified adjusted gross income phaseout thresholds. The credit begins to phase out for taxpayers with adjusted gross income in excess of $400,000 (in the case of married taxpayers filing a joint return) and $200,000 (for all other taxpayers). These phaseout thresholds are not indexed for inflation.

The amount of the child tax credit is indexed for inflation using the C–CPI–U for taxable years beginning after December 31, 2025.

To claim the child tax credit, the taxpayer must have a valid social security number on the return for the taxable year. Additionally, the SSN must be issued to a citizen of the United States. The omission of a valid SSN will be treated as a mathematical or clerical error.

California does not conform to the child tax credit under IRC section 24 and has no comparable credit.

California has a refundable Young Child Tax Credit (YCTC). The YCTC is allowed to an eligible individual who has been allowed the California Earned Income Tax Credit (EITC), has at least one qualifying child for the EITC, and has one qualifying child under the age of six years old as of the last day of the year. The maximum amount of the refundable credit is $1,000 and phases in at $25,000 of earned income and phases out at $30,000.

Under the Administration of Franchise and Income Tax Law (AFITL), FTB treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster youth tax credit. California doesn’t conform to the definition of mathematical or clerical error under IRC section 6213. As a result, California does not conform to the changes made by this provision related to IRC section 6213.

The provision makes permanent the 20 percent deduction for qualified business income (QBI), established under the Tax Cuts and Jobs Act (Public Law 115-97, section 11011), which would have expired on December 31, 2025. In addition, the minimum deduction for QBI is set to $400.

The provision also increases phase-in threshold amount on taxable income based on W-2 wages paid and capital from $50,000 to $75,000 ($100,000 to $150,000 in the case of a joint return). A disallowance of the deduction with respect to specified service trades or businesses is also phased in above the threshold amount of taxable income.

The provision defines the term “applicable taxpayer” as a taxpayer whose aggregate qualified business income with respect to all active qualified trades or businesses of the taxpayer for such taxable year is at least $1,000.

The provision defines the term “active qualified trade or business” as any qualified trade or business of the taxpayer in which the taxpayer materially participates (within the meaning of IRC section 469(h)).

The amount for both the QBI minimum deduction and applicable taxpayer’s aggregate qualified business income are indexed for inflation using the Chained Consumer Price Index for All Urban Consumers (C–CPI–U) for taxable years beginning after December 31, 2026.

California does not conform, under the PITL, to the federal deduction for qualified business income of pass-through entities under IRC section 199A.

The estimated revenue impact to conform to the above provisions would result in the following loss:

The provision makes permanent the estate and gift tax exemption amounts for estates of decedents dying and gifts made, established under the Tax Cuts and Jobs Act (Public Law 115-97, section 11061), made after December 31, 2025. This is accomplished by increasing the basic exclusion amount (IRC section 2010(c)(3)) from $5 million to $15 million.

The basic exclusion amount is indexed for inflation using the Chained Consumer Price Index for calendar years after 2026.

California law conforms, under the PITL, to federal AMT rules as of the specified date of January 1, 2025, with modifications. California has its own AMT exemption amounts and exemption phaseout thresholds (see tables below) and the California AMT exemption and exemption phaseout threshold amounts are automatically indexed for inflation. Therefore, this provision’s modification of the AMT exemption and exemption threshold amounts does not apply to the California AMT.

California 2025 Amounts:

The estimated revenue impact to conform to the above provisions would result in the following gain:

This provision makes permanent the Tax Cuts and Jobs Act provision (Public Law 115-97, section 11044), that was set to expire on December 31, 2025, limiting the itemized deduction for personal casualty or theft loss to only those losses attributable to a Federally declared disaster. This provision expands the itemized deduction for losses if they were attributable to a State declared disaster.

This provision adds and defines the term “State declared disaster”, as any natural catastrophe which includes any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, drought, or, regardless of cause, any fire, flood, or explosion, in any part of the State. The Governor of such state will make the determination with the Secretary of the Treasury whether the natural catastrophe causes damage of sufficient severity and magnitude to warrant the application of this rule.

Under the PITL, California conforms to the treatment of personal casualty loss deductions under IRC section 165(h), as of the specified date of January 1, 2025, with modifications and specifically does not conform to the federal modification to only allow a deduction for presidentially declared or State declared disasters as personal casualty losses.

California tax law identifies specific events as disasters and excess disaster losses are allowed special carry forward treatment. That is, 100 percent of the excess disaster loss may be carried over for up to 15 taxable years. In addition, IRC section 165(i), relating to the election to take a loss deduction in the preceding year, applies to disasters that were the subject of a Governor’s proclamation, but not the subject of a Presidential disaster declaration.

As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following gain:

This provision permanently disallows all miscellaneous itemized deductions that are subject to the two-percent floor that were previously suspended under the Tax Cuts and Jobs Act (Public Law 115-97, section 11045), except itemized deductions for educator expenses. For purposes of the itemized deduction for educator expenses, the provision uses the definition of educator expenses from IRC section 62, without regard to the dollar limitation or language limiting the deduction to nonathletic supplies. The definition is also modified to define “educator expenses” as expenses used as part of instructional activity.

Under this provision, an interscholastic sports administrator or coach is included under the definition of an eligible educator who is eligible to deduct unreimbursed educator expenses.

Under the PITL, California conforms to the federal rules relating to miscellaneous itemized deductions under IRC section 67, as of the specified date of January 1, 2025, with modifications, but specifically does not conform to the federal disallowance of all miscellaneous itemized deductions subject to the two-percent floor. California also does not conform to the allowance of “educator expenses” for purposes of miscellaneous itemized deductions. As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following gain:

This provision modifies the overall limitation on itemized deductions that was paused under the Tax Cuts and Jobs Act (Public Law 115-97, section 11046).

Under this provision, the total allowable amount of itemized deductions is reduced by 2/37 of the lesser of:

• the total allowable amount of itemized deductions for the taxable year or
• the taxpayer’s amount of taxable income, without regards to this section and increased by the itemized deductions, that exceeds the dollar amount at which the 37% tax bracket applies to the taxpayer.

The provision no longer carves out deductions for medical expenses, investment interest, and casualty, theft or gambling losses from the limitation.

This provision also excludes the limitation on the total allowable amount of itemized deductions for purposes of determining the qualified business income deduction, which allows a taxpayer, other than a corporation, to deduct for any taxable year an amount equal to the lesser of the taxpayer’s combined qualified business income amount or an amount equal to 20 percent of the excess (if any) of the taxpayer’s taxable income over the net capital gain of the taxable year (IRC section 199A).

Under the PTIL, California conforms to the overall limitation on itemized deductions as of the specified date of January 1, 2025, with modifications, but does not conform to this federal modification of the overall limitation on itemized deductions.

California phases out itemized deductions for taxpayers whose AGI exceeds certain thresholds. For 2025, the amount of otherwise allowable itemized deductions (other than medical expenses, investment interest, casualty, theft, or wagering losses) is reduced by the lesser of:

• Six percent of the amount of the taxpayer’s AGI in excess of $252,203 for single or married-filing-separate/RDP taxpayers, $504,411 for married/RDP taxpayers filing a joint return, and $378,310 for taxpayers who file under the head-of-household status, or
• 80 percent of the amount of the itemized deductions otherwise allowable for such taxable year.

Under the PITL, California does not conform to the federal deduction for qualified business income under IRC section 199A.

As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following loss:

This provision permanently removes the exclusion from gross income and the exception that prohibits the deduction for reimbursements of qualified bicycle commuting expenses as previously suspended by the Tax Cuts and Jobs Act (PL 115-97, section 11047).

Under the PITL, California conforms to the federal rules that allowed a gross income exclusion for qualified bicycle commuting expenses as of the specified date of January 1, 2025. California did not conform to the temporary federal suspension of the exclusion for taxable years beginning after December 31, 2017, and before January 1, 2026, and does not conform to the permanent federal suspension of this exclusion.

However, current California law provides an exclusion from gross income for any compensation or the fair market value of any other benefit, except salary or wages, received by an employee from an employer for participation in any ridesharing arrangement in California, including an employee bicycling to or from his or her place of work. This enhanced exclusion is not subject to any limitation.

As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following loss:

This provision permanently disallows the deduction for moving expenses as previously suspended under Tax Cuts and Jobs Act (Public Law 115-97, section 11049), except for a member of the Armed Forces on active duty who moves pursuant to a military order and incident to a permanent change of station. This provision adds an exception to the permanent disallowance of the deduction for an employee or new appointee of the intelligence community who moves pursuant to a change in assignment which requires relocation.

This provision also permanently removes the exclusion from gross income reimbursements of qualified moving expenses, except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station. This provision adds an exception to the permanent removal of the exclusion for an employee or new appointee of the intelligence community who moves pursuant to a change in assignment that requires relocation (IRC section 132(g)).

Under PITL, California generally conforms to IRC section 217 as of the specified date of January 1, 2025 but does not conform to the federal temporary suspension of the qualified moving expense deduction for taxable years 2018 through 2025 prescribed under the Tax Cuts and Jobs Act (Public Law 115-97) nor the permanent suspension of the deduction established under this federal provision.

Under the PITL, California conforms to the federal rules relating to the gross income exclusion for qualified moving expense reimbursement under IRC section 132(g), as of the specified date of January 1, 2025, but does not conform to the federal temporary suspension enacted under the Tax Cuts and Jobs Act or the permanent suspension of this exclusion.

As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following gain:

This provision makes permanent the federal clarification that the limitation on losses from wagering transactions applies not only to the actual costs of wagers incurred by an individual, but to other expenses incurred by the individual in carrying on any wagering transaction established under the Tax Cuts and Jobs Act (Public Law 115-97, section 11050). This provision also limits wagering losses sustained on wagering transactions to 90 percent of the amount of losses and only to the extent of the gains during the taxable year from such transactions, for taxable years beginning after December 31, 2025.

Under the PITL, California generally conforms to IRC section 165 relating to the deduction for losses as of the specified date, January 1, 2025, under block conformity pursuant to RTC section 17201, but does not conform to the clarification or limitation of the deduction made under the Tax Cuts and Jobs Act or this federal provision. As a result, California does not conform to the changes made by this provision.

As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following gain:

The IRC provides for a tax-favored savings program intended to benefit disabled individuals, known as qualified ABLE programs. The provision makes permanent the increased contribution limitation to ABLE accounts under certain circumstances, which was set to expire under the Tax Cuts and Jobs Act (Public Law (P.L.) 115-97, section 11024(a)), for contributions made before January 1, 2026.

While the general overall limitation on contributions (the per-donee annual gift tax exclusion ($19,000 for 2025)) remains the same, the limitation is increased with respect to contributions made by the designated beneficiary of the ABLE account. Under the provision, after the overall limitation on contributions is reached, an ABLE account’s designated beneficiary may contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual’s compensation for the taxable year.

The provision also modified the cash contribution annual inflation calculation to require the cost-of-living base year calculation to begin one year earlier, replacing the 1997 starting year with 1996.

California conforms, under the PITL, relating to qualified ABLE programs and accounts under IRC section 529A, as of the specified date of January 1, 2025, with modifications.

In 2019, Assembly Bill 91 was chaptered to conform to section 11024, of P.L. 115-97, relating to the temporary ABLE account contribution limitation increase, which applies to contributions made before January 1, 2026.

California does not conform to the new federal law that makes the change to ABLE accounts permanent or the inflation adjustment calculation.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

Federal law provides a nonrefundable tax credit for eligible taxpayers for qualified retirement savings contributions. The maximum annual contribution eligible for the credit is $2,000 per individual. The credit rate depends on the adjusted gross income of the taxpayer.

The provision permanently allows designated beneficiaries of ABLE accounts to claim the saver’s credit for contributions made to the designated beneficiaries’ ABLE account. This provision was set to expire under the Tax Cuts and Jobs Act (Public Law 115-97, section 11024(b)), for contributions made before January 1, 2026. The provision also increases the credit amount to $2,100 for taxable years beginning after December 31, 2026.

In addition, the new federal law extended the date for all other eligible qualified retirement contributions, for the credit, from before January 1, 2026, to before January 1, 2027. Impacted contributions include (1) elective deferrals to an IRC section 401(k) plan, an IRC section 403(b) plan, a governmental IRC section 457 plan, a SIMPLE plan, or a SARSEP; (2) contributions to a traditional or Roth IRA; and (3) voluntary after-tax employee contributions to a qualified retirement plan or IRC section 403(b) plan.

California does not conform to the saver’s credit under IRC section 25B and has no comparable credit. As a result, California does not conform to the changes made by this provision.

The provision permanently allows amounts from qualified tuition programs (also known as 529 accounts) to be rolled over to an ABLE account without being included in gross income and without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. This provision was set to expire under the Tax Cuts and Jobs Act (Public Law (P.L.) 115-97, section 11025) before January 1, 2026. Such rolled-over amounts count towards the overall limitation on amounts that can be contributed to an ABLE account within a taxable year. Any amount rolled over that is in excess of this limitation shall be includible in the gross income of the distributee in a manner provided by IRC section 72.

California conforms, under the PITL, to qualified tuition programs under IRC section 529, as of the specified date of January 1, 2025, with modifications.

In 2019, Assembly Bill 91 was chaptered to conform to Section 11025(a) of P.L. 115-97, relating to the temporary law allowing rollovers to ABLE programs from 529 accounts programs, and applies to contributions made before January 1, 2026. California does not conform to the new federal law that makes the rollover change for ABLE accounts permanent.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

The provision makes permanent the change under the Tax Cuts and Jobs Act (Public Law 115-97, section 11026), which granted combat zone tax benefits to the Sinai Peninsula of Egypt if, as of the date of enactment of the provision, any member of the Armed Forces of the United States is entitled to special pay under section 310 of title 37, United States Code (relating to special pay; duty subject to hostile fire or imminent danger), for services performed in such location. This benefit was scheduled to last only during the period such entitlement is in effect but not later than taxable years beginning before January 1, 2026.

The provision expands hazardous duty areas to include Kenya, Mail, Burkina Faso, and Chad.

The provision also removes the ending operative period and the withholding requirements, thereby providing permanent combat zone tax benefits not subject to withholding.

California conforms to the federal rules that treat a qualified hazardous duty area as if it were a combat zone for purposes of applying IRC section 2(a)(3), relating to a special rule where a deceased spouse was in missing status; IRC section 112, relating to certain combat zone compensation of members of the Armed Forces; IRC section 692, relating to income taxes of Armed Forces members upon death; and IRC section 7508, relating to time for performing certain acts postponed by reason of service in combat zone, as of the specified date of January 1, 2025. A qualified hazardous duty area is defined as Bosnia and Herzegovina, Croatia, or Macedonia if, as of March 20, 1996, any member of the Armed Forces of the United States is entitled to certain special pay provisions, relating to duty subject to hostile fire or imminent danger, for services performed in that country. However, California does not conform to the new federal provisions that define the Sinai Peninsula of Egypt, Kenya, Mali, Burkina Faso, and Chad as qualified hazardous duty areas.

California also does not conform to the estate tax provision applicable to members of the Armed Forces dying in a combat zone or by reason of combat-zone-incurred wounds, etc., under IRC section 2201, nor to allowing a joint return where an individual is in missing status, under IRC section 6013(f)(1).

The FTB does not administer excise taxes similar to the taxation of phone service originating from a combat zone from members of the Armed Forces under IRC section 4253(d).

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

The provision permanently provides a gross income exclusion for certain loan amounts that are discharged on account of death or disability after December 31, 2025. The exclusion was set to expire on December 31, 2025, as established under the Tax Cuts and Jobs Act (Public Law (P.L.) 115-97, section 11031) and American Rescue Plan Act of 2021 (P.L. 117-2, section 9675). Student loans that continue to be eligible for the exclusion are loans made by (1) the United States (or an instrumentality or agency thereof), (2) a State (or any political subdivision thereof), (3) certain tax-exempt public benefit corporations that control a State, county, or municipal hospital and whose employees have been deemed to be public employees under State law, (4) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on, and includes refinanced loans, (5) an organization exempt from tax under IRC section 501(a) for refinanced loans, or (6) private education loans (for this purpose, private education loan is defined in section 140(a) of the Consumer Protection Act).

The discharge of a loan as described above is excluded from gross income if the discharge was pursuant to the death or total and permanent disability of the student.

To be eligible for the income exclusion for discharged student loans, the taxpayer must have a valid social security number on the return for the taxable year. The omission of a valid social security number will be treated as a mathematical or clerical error.

California generally conforms, under the PITL, to the federal income tax rules relating to the cancellation of student loans under IRC section 108, as of the specified date of January 1, 2025, with modifications explained below.

In 2019, Assembly Bill 91 was chaptered to conform to Section 11031(a) of P.L. 115-97, relating to the income exclusion for loan discharges on account of death or total and permanent disability and applies to discharges of indebtedness after December 31, 2018. As a result, California conforms to the changes made by this provision for the gross income exclusion for student loan discharges due to the death or disability of the debtor for discharges after December 31, 2025, but does not conform to the change requiring the taxpayer to have a valid social security number on the return for the taxable year.

Additionally, regarding the omission of a taxpayer’s social security number, California has stand-alone law. Under the Administration of Franchise and Income Tax Law, FTB treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster your tax credit.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

The provision permanently limits the amount allowed as an itemized deduction for the aggregate amount of state and local, etc. taxes. Under the Tax Cuts and Jobs Act (Public Law (P.L.) 115-97, section 11042), the deduction was limited up to $10,000 ($5,000 for married taxpayers filing a separate return) and applied to taxable years beginning after December 31, 2017, and beginning before January 1, 2026. The Inflation Reduction Act of 2022 (P.L. 117-169, section 13904) also extended the limitation to taxable years ending before January 1, 2027.

Beginning in taxable year 2025, the provision modifies the annual limitation for the aggregate amount of deductible taxes as follows:

• For taxable year 2025, $40,000.
• For taxable year 2026, $40,400.
• For taxable years 2027 through taxable year 2029, the aggregate amount is adjusted by 1 percent each taxable year with taxable year 2026 as the base year.
• For taxable year 2030 and after, $10,000.

Additionally, for taxable year 2025 through taxable year 2029, to determine the applicable limit, the provision requires a phasedown adjustment and is based on modified adjusted gross income (MAGI). The applicable limit is reduced by 30 percent of the excess of the taxpayer’s MAGI over the threshold amount (half the threshold amount in the case of a married individual filing a separate return). The threshold amount is $500,000 for taxable years 2025 and 2026, and is increased each year by 1 percent from the prior year, until 2030. This provision defines MAGI as the adjusted gross income of the taxpayer plus certain income earned or sourced outside of the United States that is excluded from gross income.

The provision provides that the phasedown adjustment cannot result in an applicable limitation amount that is less than $10,000.

California conforms, under the PITL, to the deductibility of certain taxes and other provisions related to the deductibility of taxes under IRC section 164, as of the specified date of January 1, 2025, with modifications. Specifically, California does not allow a deduction for state or local income taxes. California does not conform to the limited deduction applicable to individuals for state and local real and personal property taxes and state, local, and foreign income, war profits, and excess profits taxes for taxable years beginning after December 31, 2024. As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above federal provisions would result in the following gains:

This provision would allow a deduction of up to $25,000 for qualified tips received during the taxable year beginning on or after December 31, 2024, and before January 1, 2029. The deduction is reduced for taxpayers whose modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married filing joint). This provision also allows this deduction in addition to the standard deduction for taxpayers who do not itemize.

This provision defines “qualified tips” as cash paid, or amounts charged, including amounts received by an employee under any tip sharing arrangement in an occupation that receives tips on a customary and regular basis. Qualified tips do not include amounts that are not provided voluntarily, not in a specified service trade or business, or excluded under guidance to be established by the Secretary.

This provision requires a valid Social Security Number (SSN) to be provided on the return to claim the deduction. An omission of the correct SSN on the return is treated as a math or clerical error. Additionally, in the case of a married individual, they must file a joint return to claim the deduction.

This provision excludes amounts deducted under this provision from the definition of qualified business income. This provision expands the types of businesses that can take the credit for employer social security taxes paid to include beauty services, such as barbering and hair care, nail care, esthetics, and body and spa treatments, where tipping is customary.

This provision requires information reporting by employers to the Secretary of the Treasury and to the employee on the tip income received and occupation of the employee on information returns and statements furnished to the taxpayer.

This provision requires the Secretary of the Treasury, no later than 90 days after the enactment of this Act, to publish a list of occupations that regularly and customarily received tips on or before December 31, 2024. The Secretary is required to modify the withholding calculations to include the new deduction.

California conforms, under the PITL, to the definition of taxable income under IRC section 63, as of the specified date of January 1, 2025, with modifications. California does not conform to the federal standard deduction amounts but instead has its own standard-deduction law. Nonresidents and part-year residents are allowed a standard deduction as modified by the ratio that California AGI bears to total AGI (not to exceed 100 percent). California generally conforms, under the PITL, to additional itemized deductions, as of the specified date of January 1, 2025, with modifications. The changes made to federal law by this provision were added after January 1, 2025. As a result, California does not conform to the deduction for tips received.

Additionally, California does not conform to the federal deduction for qualified business income of pass-through entities under IRC section 199A. As a result, California does not conform to the exclusion of the amount of tips that a deduction is allowed from “qualified business income” for the purposes of the qualified business income deduction.

Under the Administration of Franchise and Income Tax Law (AFITL), the Franchise Tax Board (FTB) may require a copy of any information return required to be filed with the Secretary of the Treasury, at the time, and in the form and manner as the FTB may, by forms and instructions, require . As a result, California would conform to the changes requiring the information return related to the tip income received and occupation of the employee.

Additionally, under the AFITL, FTB treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster your tax credit. California does not conform to the definition of mathematical or clerical error under IRC section 6213. As a result, California does not conform to the changes made by this provision related to IRC section 6213.

California does not conform to the employer credit for social security taxes under IRC section 45B. As a result, California does not conform to the changes made to this provision.

Annually, FTB is required to provide the EDD with wage withholding tables to be used by employers to withhold taxes on wages paid to their employees. The tables are based on the estimated amount of tax due on the wages paid by the employer. FTB does not conform to the requirement to modify withholding calculations under IRC section 3402.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

This provision would allow a deduction of an amount equal to qualified overtime compensation received during the taxable year, not to exceed $12,500 ($25,000 for married filing joint), for taxable years beginning on or after December 31, 2024, and before January 1, 2029. Qualified overtime must be reported on information returns and statements furnished to the taxpayer. The deduction is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 in the case of a joint return). This provision also allows this deduction in addition to the standard deduction for taxpayers who do not itemize.

This provision defines “qualified overtime compensation” as overtime compensation paid to an individual as required under section 7 of the Fair Labor Standards Act of 1938 that exceeds the regular rate of paid to the employed individual. Qualified overtime compensation does not include any qualified tips.

This provision requires a valid social security number (SSN) to be provided on the tax return to claim the deduction. An omission of the correct SSN on the return is treated as a math or clerical error. Additionally, in the case of a married individual, they must file a joint return to claim the deduction.

This provision requires information reporting by employers to the Secretary of the Treasury and to the employee on the amount of overtime compensation paid to the employee on W-2. Additionally, payors must provide this information to non-employees on Form 1099. The Secretary is required to modify the withholding calculations to include the new deduction.

California conforms, under the PITL, to the definition of taxable income under IRC section 63, as of the specified date of January 1, 2025, with modifications. California does not conform to the federal standard deduction amounts but instead has its own standard-deduction law. Nonresidents and part-year residents are allowed a standard deduction as modified by the ratio that California AGI bears to total AGI (not to exceed 100 percent). California generally conforms, under the PITL, to additional itemized deductions, as of the specified date of January 1, 2025, with modifications. The changes made to federal law by this provision were added after January 1, 2025. As a result, California does not conform to the deduction for the overtime paid.

Under the Administration of Franchise and Income Tax Law (AFITL), the Franchise Tax Board (FTB) may require a copy of any information return required to be filed with the Secretary of the Treasury, at the time and in the form and manner as the FTB may, by forms and instructions, require. As a result, California would conform to the changes requiring the information return related to the amount of overtime compensation paid to the employee on W-2.

Additionally, under the AFITL, FTB treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster youth tax credit. California doesn’t conform to the definition of mathematical or clerical error under IRC section 6213. As a result, California does not conform to the changes made by this provision related to IRC section 6213.

Annually, FTB is required to provide the EDD with wage withholding tables to be used by employers to withhold taxes on wages paid to their employees. The tables are based on the estimated amount of tax due on the wages paid by the employer. FTB does not conform to the requirement to modify withholding calculations under IRC section 3402.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

This provision allows a deduction up to $10,000 for interest paid or accrued on a qualified passenger vehicle loan for taxable years beginning after December 31, 2024, and before January 1, 2029. The deduction is reduced by $200 for every $1,000 (or portion of) by which the modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for married filing joint). This provision also allows this deduction in addition to the standard deduction for taxpayers who do not itemize.

This provision defines “qualified passenger vehicle loan interest” as interest paid or accrued during the taxable year on indebtedness incurred by the taxpayer after December 31, 2024, which is secured as a first lien or on a refinanced loan on an applicable passenger vehicle used for personal use. The deduction cannot be used for interest paid or incurred on a loan to finance fleet sales, commercial vehicles not used for personal use, lease financing, a vehicle with a salvage title, or a vehicle intended to be used for scrap or parts.

The deduction would also be allowed for a refinanced loan if the indebtedness is secured by a first lien on the applicable vehicle but only to the extent the indebtedness does not exceed the amount of the refinanced indebtedness. In addition, the deduction is not allowed for indebtedness owed to a related party.

The provision defines “applicable passenger vehicle” as a car, minivan, van, sports utility vehicle, pickup truck, or motorcycle used on public streets, roads, and highways. The vehicle’s original use must begin with the taxpayer. The vehicle must have at least two wheels, be treated as a motor vehicle under the Clean Air Act and has a gross vehicle weight rating of less than 14,000 pounds. The vehicle’s final assembly must take place in the U.S., where the vehicle is produced at or through the use of a plant, factory, or other place where it is delivered to a dealer with all components permanently installed or not necessary to operate the vehicle.

The deduction is not allowed unless the vehicle identification number (VIN) of the qualified passenger vehicle tis included on the individual’s tax return. This provision requires information reporting by any person who is engaged in a trade or business and through the business receives interest aggregating $600 or more for any calendar year on a passenger vehicle loan to report to the Secretary of the Treasury on the amount of interest received. Additionally, any person required to report to the Secretary of the Treasury must provide this information to taxpayers on an information return. A penalty would apply for failure to file a return reporting passenger vehicle loan interest and for failure to provide a payee statement to the taxpayer, unless the failure to file is due to reasonable cause and not willful neglect.

California generally conforms, under the personal income tax law (PITL), to additional itemized deductions, as of the specified date of January 1, 2025, with modifications. The changes made to federal law by this provision were added after January 1, 2025. As a result, California does not conform to the deduction for passenger vehicle loan interest.

Under the Administration of Franchise and Income Tax Law (AFITL), the FTB may require a copy of any information return required to be filed with the Secretary of the Treasury, that is added to the IRC by a public law enacted on or after January 1, 2009, at the time and in the form and manner as the FTB may, by forms and instructions, require. As a result, California would conform to the provision requiring the information return related to the passenger vehicle loan.

California generally conforms to IRC section 6724 for reasonable cause waiver, definition, and special rules, as of January 1, 2025, with modifications, but does not conform to the modifications made under this provision.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

This provision creates an individual retirement account, also known as a “Trump account”. A “Trump account” is defined as an individual retirement account (IRA) under IRC section 408(a) that is not designated as a Roth IRA and is for the benefit of an eligible individual or their beneficiaries. This provision defines an “eligible individual” as an individual (beneficiary) who has not turned 18 years before the end of the calendar year and who has a valid social security number (SSN). The account must be invested in an established mutual fund or stock exchange fund.

This provision does not allow a deduction for contributions made to the Trump Account before the first day of the calendar year that the eligible individual attains age 18. Contributions are limited to $5,000 per calendar year until the calendar year that the eligible individual turns 18 and a cost-of-living adjustment will be applied to that amount beginning after 2027. If the eligible individual dies before their 18th birthday, the account ceases to be a Trump Account and any person or estate of the beneficiary who acquires the account must include in their gross income the fair market value of the account assets (reduced by the investment in the contract) in the year of the death of the account beneficiary.

Distributions are allowed from Trump Accounts beginning January 1 of the calendar year that the individual turns 18 years old. Excess contributions to the account can be distributed before the eligible individual turns 18, are not included in the gross income of the eligible individual and that amount of net income that is attributable to the excess contribution is subject to 100 percent tax. Any withdrawals for nonqualified expenses are treated as ordinary income and subject to the income tax rate and a 10 percent early withdrawal penalty if distributions are taken before the calendar year in which the beneficiary turns 18 years old and not used for rollovers to qualified ABLE rollover contributions or a rollover of the entire balance of the account to another Trump Account for that same beneficiary.

This provision also allows an employer to make contributions, limited to $2,500, adjusted annually for inflation, per calendar year, on behalf of their employee who establishes an account on behalf of an eligible individual. These accounts are not treated as a simplified employee retirement account or SIMPLE account by the employer. The employer’s contribution amount is excluded from the employee’s gross income.

Contributions can also be made by tax-exempt organizations to an eligible individual’s account or account established for a qualified class of eligible individuals as general funding contributions, as defined. These contributions would not count toward the $5,000 contribution limit.

This provision also creates a pilot program where the federal government will deposit $1,000 into a Trump Account for those that make this election for eligible children born after December 31, 2024, and before January 1, 2029. These contributions would not count toward the $5,000 contribution limit. The $1,000 payment would not be subject to reduction or offset for past due support under the Social Security Act, debts owed to federal agencies, state income tax obligations, unemployment compensation debts, or assessed federal taxes subject to levy or collection. The eligible child must be a U.S. citizen and have an SSN. This provision will impose a penalty of $500 or $1,000, respectively, if the account is negligently or fraudulently established. An omission of the correct SSN on the return for the child, or taxpayer claiming the child, or taxpayer’s spouse, is treated as a math or clerical error.

Under RTC sections 17501 and 24601, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC sections 402, 408, and 408A. However, California does not automatically conform to the Trump Account provisions under IRC section 530A that was added under Subchapter F.

California conforms, under the PITL, relating to items that are specifically excluded from gross income in RTC section 17131, as of the specified date of January 1, 2025. The federal $1,000 pilot contributions to Trump Accounts for children born in 2025 through 2028 are treated as a payment against the federal tax and provides a refund of that payment to the eligible child's Trump Account under IRC section 6434. California does not conform to IRC section 6434. However, under California's conformity to IRC section 61, the $1000 contribution would not be considered income.

Under the specified date of January 1, 2025, California does not conform to the exclusion for certain employer contributions to a Trump account.

Under the Administration of Franchise and Income Tax Law (AFITL), Franchise Tax Board treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster youth tax credit. California does not conform to the definition of mathematical or clerical error under IRC section 6213. As a result, California does not conform to the changes made by this provision related to IRC section 6213.

California does not conform to the provision's penalty for a negligent or fraudulent election.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

The provision makes several changes to the additional first year (bonus) depreciation for qualified property, previously established under the Tax Cuts and Jobs Act (Public Law 115-97, section 13201), as follows:

• Makes permanent the 100 percent additional first year depreciation for qualified property acquired after January 19, 2025.
• Adds “qualified sound recording production” as qualified property eligible for bonus depreciation.
• Removes self-constructed property from the special rules relating to bonus depreciation.
• Modifies the special rule relating to certain plants bearing fruits and nuts which are planted or grafted by removing the operative date of January 1, 2027, and allowing the 100 percent additional bonus depreciation.
• Repeals the phase down percentages.
• Allows qualified property placed in service and specified plants planted and grafted during the first taxable year ending after January 19, 2025, to transition from specified phase down percentages to 100 percent if elected by the taxpayer.

California conforms, under the PITL, to the federal rules relating to MACRS depreciation, under IRC section 168, as of the specified date of January 1, 2025, with modifications. However, the PITL specifically does not conform to bonus depreciation; thus, the provision that modifies and extends bonus depreciation is not applicable under the PITL.

California does not conform, under the CTL, to IRC section 168, relating to MACRS depreciation. The CTL is in substantial conformity to the pre-1981 Class Life Asset Depreciation Range System (ADR) deductions. The ADR is an accounting method established by the IRS based on the “useful life” of depreciable property.

The CTL allows “additional first-year depreciation” of up to $10,000 per year. However, the CTL allows taxpayers to elect the IRC section 179 expensing deduction in lieu of “additional first-year depreciation.” Property qualifying for “additional first-year depreciation” is similar to property qualifying under IRC section 179. However, a corporation is allowed only one or the other of the expensing deductions, not both.

This provision creates a new IRC section 174A to allow a deduction for domestic research or experimental expenditures in the year paid or incurred by the taxpayer during the taxable year beginning after December 31, 2024. The provision defines the term “domestic research or experimental expenditures” as research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer's trade or business other than expenditures that are attributable to qualified foreign research activities under the federal research credit as defined in IRC section 41(d)(4)(F).

This provision allows a taxpayer to charge domestic research and experimental expenditures to a capital account and amortize those expenditures ratably over 60 months. The taxpayer may also elect to take the deduction on a prior timely filed return, which would be after December 31, 2021.

This provision would apply the following special rules:

• Expenditures for the acquisition or improvement of land or improvement of property used in connection with research or experimentation that is depreciated would not be allowed to apply the deduction.
• Expenditures paid or incurred to determine the existence of, location, extent or quality of ore deposits, or other mineral including oil and gas, would not be allowed to apply the deduction.
• Amounts paid or incurred for the development of software can be treated as a research or experimental expenditure.

The provision modifies IRC section 174 and replaces the term “specified” with “foreign” to identify research or experimental expenditures. Foreign research or experimental expenditures are required to be amortized ratably over the 15-year period. The definition of foreign research or experimental expenditures is modified to include expenditures which are attributable to qualified foreign research activities under the federal research credit (as defined in IRC section 41(d)(4)(F)).

Additionally, the research credit is amended to add the deduction for domestic research or experimental expenditures (IRC section 174A).

The provision amends IRC section 280(c)(1) to require taxpayers to reduce the deduction for domestic research or experimental expenditures under IRC section 174A by the amount of the research credit allowed under IRC section 41. Deductions for domestic and foreign research or experimental expenditures are also required to be calculated when computing alternative minimum tax under IRC section 56(b)(2).

The provisions and treatment, as described above, related to IRC section 174A, are treated as a change in method of accounting for purposes of IRC section 481.

California does not conform to IRC 174A. California conforms, under the PITL and the CTL, to IRC section 174, relating to research and experimental expenditures, as of the specified date of January 1, 2025, but does not conform to the modification to the federal changes relating to the deduction of research and experimental expenditures.

Additionally, California generally conforms, under the PITL and the CTL, to IRC section 280C, relating to the credit for increasing research activities, as of the specified date of January 1, 2025. However, California does not conform to the federal changes that require the deduction of domestic research or experimental expenditures be reduced by the amount of research credit allowed.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

The provision makes permanent the computation of adjusted taxable income without a deduction for depreciation, amortization, or depletion deduction when determining the amount allowed as a deduction for business interest, which was previously limited to taxable years before January 1, 2022, under the Tax Cuts and Jobs Act (Public Law 115-97, section 13301).

The provision also expands the definition of motor vehicle for floor plan financing interest used in determining the amount allowed as a deduction for business interest, to also include any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle.

California conforms, under the PITL and the CTL, to the federal rules for the deduction of interest under IRC section 163, as of the specified date of January 1, 2025. Under the CTL, California specifically does not conform to the federal limitations on deductions of business interest. California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

The provision makes permanent the employer credit for paid family and medical leave created under the Tax Cuts and Jobs Act (Public Law 115-97, section 13403).

The provision also expands the eligibility for employers to claim a general business credit for paid family and medical leave to include premiums paid or incurred for an insurance policy, regardless of whether any qualifying employees were on family and medical leave during the taxable year. The provision would allow any leave paid by State or local government to be taken into account when determining the amount of family and medical leave provided by the employer but that leave should not be used when determining the amount of credit. Additionally, there cannot be a double benefit for the premiums paid or incurred as a deduction as provided in IRC section 280C.

The provision also modifies the definition of “qualifying employee” to require that the employee be customarily employed for not less than 20 hours per week and, at the election of the employer, must be employed for not less than six months. The definition also specifies that compensation be determined on an annualized basis, or pro-rata for part-time employees.

The provision also modifies the “aggregation rules” to provide that all persons treated as a single employer under IRC section 414 are treated as a single employer unless the person has a substantial and legitimate business reason for not having a written family medical leave policy as specified.

California does not conform to IRC section 45S, relating to the employer credit for paid family and medical leave, and has no comparable credit. As a result, California does not conform to the changes made by this provision.

A deduction for 50 percent of the expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer was previously allowed under the Tax Cuts and Jobs Act (Public Law 115-97, section 13304) for amounts paid or incurred after December 31, 2017 and before January 1, 2026.

The provision provides an exception to allow the deduction for expenses of goods and services sold by the employer as entertainment to customers or for food or beverages provided to crew members of a commercial vessel.

The provision allows a full deduction for meal expenses provided to crew members of a fishing vessel, fish processing vessel, or fish tender vessel, or at a facility that processes fish for commercial use or consumption located in the United States north of 50 degrees latitude north and not located in a metropolitan statistical area, including for the expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer.

California conforms, under the PITL and the CTL, to the federal rules for the deductibility of fringe benefits under IRC section 274, as of the specified date of January 1, 2025, but does not conform to the federal law relating to the deduction disallowance for entertainment, amusement, or recreation that is directly related to the active conduct of a trade or business. Additionally, California does not conform to federal law relating to the deduction for meal expenses provided to crew members on a fishing vessel. As a result, California does not conform to the federal modifications made under this provision.

The provision increases the maximum amount a taxpayer may expense under IRC section 179 from $1,000,000 to $2,500,000 and increases the phaseout threshold amount from $2,500,000 to $4,000,000. The previous amounts were set under the Tax Cuts and Jobs Act (Public Law 115-97, section 13101). The $2,500,000 expense and $4,000,000 phaseout threshold amounts are indexed for inflation for taxable years beginning after 2025.

California conforms, under the PITL and the CTL, to the IRC section 179 expensing provisions, as of the specified date of January 1, 2025, with modifications, but does not conform to the federal maximum expense and phaseout threshold amounts. As a result, the federal modifications to these amounts are not applicable to California.

In addition, the CTL allows “additional first-year depreciation” of up to $10,000 per year. However, the CTL allows taxpayers to elect the IRC section 179 expensing deduction in lieu of “additional first-year depreciation.” Property qualifying for “additional first-year depreciation” is similar to property qualifying under IRC section 179. However, a corporation is allowed only one or the other of the expensing deductions, not both.

The provision classifies and adds “any qualified production property” as property that is depreciated under modified accelerated cost recovery system (MACRS). However, the provision allows a taxpayer a special depreciation deduction of 100 percent of the adjusted basis for any qualified production property placed in service during the taxable year and the adjusted basis must be reduced by the amount of the deduction before computing the allowable depreciation deduction. The provision defines qualified production property as the portion of any nonresidential real property that meets the following:

• Used as an integral part of the qualified production activity
  • However, qualified property where the taxpayer is a lessor and the property is used by a lessee cannot be considered to be used by the taxpayer as part of a qualified production activity.
• Placed in service in the United States or any possession of the United States
• Original use commences with the taxpayer
• Construction begins after January 19, 2025, and before January 1, 2029
• Designated by the taxpayer as an election under this provision, and
• Placed in service before January 1, 2031.

The provision excludes from qualified production property a portion of any nonresidential real property which is used for office space, administrative services, lodging, parking, sales activities, research, software or engineering, or other functions unrelated to the manufacturing, production, or refining of tangible personal property.

The provision includes special rules to allow the deduction for property acquired by the taxpayer after January 19, 2025, and before January 1, 2029, and if the property was not previously used in qualified production activities during the period beginning on January 1, 2021, and ending on May 12,2025. Additionally, the provision defines qualified production activity to include the manufacturing, production, or refining of a qualified product. Production includes only agricultural and chemical production. The provision also defines a qualified product as any tangible personal property if such property is not a food or beverage that is prepared in the same building as a retail establishment in which such property is sold.

The provision also allows the Secretary to determine an extension for the placed in-service date, if the Secretary determines that an act of God prevents the taxpayer from placing such property in service before such date. This provision allows special depreciation allowances for qualified production property and does not include property where the alternative depreciation system applies.

The provision requires recapture under IRC section 1245 of any qualified production property if within 10 years of the date the property is placed in service, the property ceases to be used as qualified production property, and how the property is used changes.

California conforms with modifications, under the PITL, to the federal rules relating to MACRS depreciation, under IRC section 168, as of the specified date of January 1, 2025. However, California does not conform to this provision to allow the special depreciation treatment for any qualified production property.

California also conforms with modification, under the PITL, to the federal rules relating to capital gains and losses, as of the specified date of January 1, 2025, but does not conform to treatment of any qualified production property as IRC section 1245 property.

California does not conform, under the CTL, to IRC section 168, relating to MACRS depreciation. The CTL is in substantial conformity to the pre-1981 Class Life Asset Depreciation Range System (ADR) deductions. The ADR is an accounting method established by the IRS based on the “useful life” of depreciable property.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

A non-refundable advanced manufacturing investment credit is allowed for the qualified investment to any advanced manufacturing facility of an eligible taxpayer. This provision increases the credit from 25 percent to 35 percent.

California does not conform to the advanced manufacturing investment credit. As a result, California does not conform to the changes made by this provision.

This provision adds “spaceports” to the list of tax-exempt facility bonds, which expands the gross income exclusion for interest on tax-exempt facility bonds to include interest on bonds for which at least 95% of the net proceeds are used to finance a spaceport.

A spaceport located on land leased by the government could still be treated as owned by a governmental unit if the other requirements for tax-exempt facility bonds are met by the lease and sublease of the property.

This provision defines spaceports as facilities involved in manufacturing, assembling, or repairing spacecraft, flight control operations, and services located at or in close proximity for launching or reentering sites or transferring crew, spaceflight participants, or space cargo to and from spacecraft. Additionally, qualified spaceports do not need to be publicly accessible to qualify as a spaceport.

This provision modifies the computation of taxable income for purposes of calculating the foreign tax credit (FTC) limitation (Internal Revenue Code (IRC) section 904(b)) on net controlled foreign corporation (CFC) tested income, other than passive category income, included in a United States (U.S.) shareholder’s gross income for the taxable year (IRC section 904(d)(1)(A)). For purposes of this provision, a U.S. shareholder of any CFC is required to include in their gross income their share of net CFC tested income for the taxable year (IRC section 951A). Net CFC tested income is the U.S. shareholders excess (if any) of their aggregate pro rata share of CFC tested income for the taxable year, over the U.S shareholders CFC tested loss for the taxable year (IRC section 951A(b)).

This provision requires a U.S. shareholder to allocate and apportion certain deductions to foreign sourced net CFC tested income, except for interest expense and research and experimental expenditures. These deductions include any deduction allowed under the foreign derived deduction eligible income on net CFC tested income (IRC section 250(a)(1)(B)), state and local, foreign, income, war profits, and excess profits taxes (IRC section 164(a)(3)) or any other deduction directly allocable to their share of foreign sourced income.

This provision also amends IRC sections 904 and 951A related to the treatment of certain categories of foreign sourced income.

This provision increases the percentage of foreign income taxes deemed paid for taxes properly attributable to net CFC tested income. Net CFC tested income is the United States (U.S.) shareholder’s excess (if any) of their aggregate pro rata share of CFC tested income for the taxable year, over the U.S. shareholder’s CFC tested loss for the taxable year (IRC section 951A(b)). The provision increases the percentage of foreign income taxes deemed-paid from 80 percent to 90 percent of the product of the domestic corporation’s Section 951A percentage inclusion by the aggregate tested foreign income taxes paid or accrued by the CFC.

This provision also removed the gross-up requirement in IRC section 78 for previously taxed earnings and profits deemed to be paid by a domestic corporation under IRC section 960(b) to be treated as a dividend to the domestic corporation from the foreign corporation, but retained those requirements for amounts equal to the taxes deemed to be paid by a domestic corporation under IRC sections 960(a) and (d).

Additionally, this provision disallows up to 10 percent of the FTC for foreign income taxes deemed paid or accrued with respect to any amount attributable to previously taxed earnings and profits excluded under IRC section 959(a) because of net CFC tested income included in gross income under IRC section 951A.

California does not allow a FTC and does not conform to subpart F (sections 951 to 965) of the IRC, relating to CFCs, except to the extent applicable with respect to filings under a water’s-edge election. As a result, California does not conform to the changes made by this provision.

The provision modifies the taxable income computation for the purposes of calculating the FTC limitation (Internal Revenue Code (IRC) section 904(b)) on sourcing of certain inventory produced in the United States (U.S.) and sold through foreign branches. For the purpose of this provision, if a U.S. person maintains an office or other fixed place of business in a foreign country, as determined under IRC section 864(c)(5), the portion of income from a sale or exchange outside the U.S. of inventory property that is produced in the U.S., used outside of the U.S., and derived from the purchase of inventory property within a possession of the U.S, and is attributable to that office or fixed place of business, is treated as foreign source income. The amount treated as foreign source income under this provision may not exceed 50 percent of the income from the sale or exchange of such property.

California does not conform to the sourcing rules under IRC sections 861 to 865. California exercises its taxing powers based on two jurisdictional concepts: (1) the residency of the individual, and (2) the source of the income. Residents of California pay state taxes on all income received regardless of its geographical source. Nonresidents of California are taxed by California only on income derived from sources within California’s boundaries (“source income”). Source income includes wages earned from services performed in California, gains from the disposition of property located in California, and profits from business transacted in California. Intangible income, such as investment interest, is considered to originate in the state in which the recipient resides at the time it is earned, unless it is earned in connection with a trade or business.

California does not allow a FTC and does not conform to subpart F (sections 951 to 965) of the IRC, relating to controlled foreign corporations, except to the extent applicable with respect to filings under a water’s-edge election.

As a result, California does not conform to the changes made by this provision.

The provision modifies the deduction from gross income allowed to a domestic corporation for foreign-derived deduction eligible income, which is calculated as an amount equal to the sum of a percentage of the foreign-derived deduction eligible income of a domestic corporation in a taxable year plus a percentage of the net controlled foreign corporation (CFC) tested income included in gross income of that domestic corporation under Internal Revenue Code (IRC) section 951A for the taxable year and the gross-up amount treated as a dividend received under IRC section 78 for that domestic corporation for the taxable year. The provision decreases both percentages: 37.5 percent to 33.34 percent for the foreign-derived deduction eligible income and 50 percent to 40 percent for the net CFC tested income included in gross income under IRC section 951A and the gross-up amount treated as a dividend received under IRC section 78 for the taxable year. The overall impact would decrease the deduction amount allowed for taxable years beginning on or after December 31, 2025.

California does not conform to the changes to IRC section 250.

Worldwide Unitary Method

California corporate taxpayers doing business both within and without California are required to compute their California franchise or income tax using the worldwide unitary method. Under this method, a corporate taxpayer's business income from both domestic and foreign unitary operations is considered in the calculation of the taxpayer's tax base, and a share of that business income is then “apportioned” to California using a formula. Income apportioned to California is subject to California franchise or income tax. The formula measures relative levels of business activity in the state by using the amount of the taxpayer’s sales in California divided by the taxpayer's sales everywhere. This measure of activities is commonly called the “single sales-factor formula.” The amount of sales from both domestic and foreign activities are included in the calculation of the apportionment formula. Generally, dividends paid from one member to another within the unitary group from unitary earnings are eliminated from tax computations under Revenue and Taxation Code (RTC) section 25106.

California Water's-Edge Election

As an alternative to the worldwide unitary method, California law allows corporations to elect to determine the business income of their combined reporting group on a “water's-edge” basis. In general, the water’s-edge method excludes foreign corporations from the calculation of business income. An exception to this general rule is a CFC with subpart F income. The income and factors of the CFC are included in a water's-edge combined report based on the CFC's inclusion ratio. This ratio is equal to the CFC’s current year subpart F income divided by the CFC’s current year earnings and profits. While California does not conform to the subpart F scheme of the IRC, for purposes of computing the CFC's inclusion ratio under water's-edge, California incorporates the federal definitions of "subpart F income" and "earnings and profits" as applicable for federal income tax purposes for the same taxable year.

Generally, rather than computing a dividends-received deduction using federal dividends received deduction (DRD) provisions, dividends paid to the water's-edge combined reporting group from foreign affiliates are income on the water's-edge combined report and California taxpayers electing water's-edge treatment are generally entitled to a 75 percent DRD on such dividends under RTC section 24411.

As a result, California does not conform to the changes made by this provision.

The provision modifies the definition of DEI when computing gross income for domestic corporations under this provision.

This provision defines the term DEI to mean, with respect to any domestic corporation, the excess (if any) of the gross income of the domestic corporation without regard to certain exceptions to DEI over expenses and deductions (including taxes), other than interest expense and research or experimental expenditures, properly allocable to such gross income, subject to several exceptions. The provision also added an additional exception to DEI for any income and gain from the sale or disposition (including the deemed sale or other deemed disposition under IRC section 367(d)) of intangible property and any other property subject to depreciation, amortization, or depletion by the seller.

California does not conform to the changes to IRC section 250.

Worldwide Unitary Method

California corporate taxpayers doing business both within and without California are required to compute their California franchise or income tax using the worldwide unitary method. Under this method, a corporate taxpayer's business income from both domestic and foreign unitary operations is considered in the calculation of the taxpayer's tax base, and a share of that business income is then “apportioned” to California using a formula. Income apportioned to California is subject to California franchise or income tax. The formula measures relative levels of business activity in the state by using the amount of the taxpayer’s sales in California divided by the taxpayer's sales everywhere. This measure of activities is commonly called the “single sales-factor formula.” The amount of sales from both domestic and foreign activities are included in the calculation of the apportionment formula. Generally, dividends paid from one member to another within the unitary group from unitary earnings are eliminated from tax computations under Revenue and Taxation Code (RTC) section 25106.

California Water's-Edge Election

As an alternative to the worldwide unitary method, California law allows corporations to elect to determine the business income of their combined reporting group on a “water's-edge” basis. In general, the water’s-edge method excludes foreign corporations from the calculation of business income. An exception to this general rule is a CFC with subpart F income. The income and factors of the CFC are included in a water's-edge combined report based on the CFC's inclusion ratio. This ratio is equal to the CFC’s current year subpart F income divided by the CFC’s current year earnings and profits. While California does not conform to the subpart F scheme of the IRC, for purposes of computing the CFC's inclusion ratio under water's-edge, California incorporates the federal definitions of "subpart F income" and "earnings and profits" as applicable for federal income tax purposes for the same taxable year.

Generally, rather than computing a dividends-received deduction using federal dividends received deduction (DRD) provisions, dividends paid to the water's-edge combined reporting group from foreign affiliates are income on the water's-edge combined report and California taxpayers electing water's-edge treatment are generally entitled to a 75 percent DRD on such dividends under RTC section 24411.

As a result, California does not conform to the changes made by this provision.

The provision amends Internal Revenue Code (IRC) section 951A to replace the term “global intangible low-taxed income” (formerly known as GILTI) with “net CFC tested income,” repeals the deemed tax-free return of foreign investments provisions under IRC 951A (b) and (d), redesignates several subsections under this section, and adds additional amendments conforming to the changes under this provision.

This provision also amends IRC section 250(a)(1)(A) to replace the term “foreign-derived intangible income” and inserting “foreign-derived deduction eligible income,” redesignates several subsections under this section, replaces the term “intangible” with “deduction eligible,” and adds additional amendments conforming to the changes under this provision.

California does not conform to subpart F (sections 951 to 965) of the IRC, relating to CFCs, except to the extent applicable with respect to filings of a water’s-edge election. California does not conform to changes to IRC section 250.

Worldwide Unitary Method

California corporate taxpayers doing business both within and without California are required to compute their California franchise or income tax using the worldwide unitary method. Under this method, a corporate taxpayer's business income from both domestic and foreign unitary operations is considered in the calculation of the taxpayer's tax base, and a share of that business income is then “apportioned” to California using a formula. Income apportioned to California is subject to California franchise or income tax. The formula measures relative levels of business activity in the state by using the amount of the taxpayer’s sales in California divided by the taxpayer's sales everywhere. This measure of activities is commonly called the “single sales-factor formula.” The amount of sales from both domestic and foreign activities are included in the calculation of the apportionment formula. Generally, dividends paid from one member to another within the unitary group from unitary earnings are eliminated from tax computations under Revenue and Taxation Code (RTC) section 25106.

California Water's-Edge Election

As an alternative to the worldwide unitary method, California law allows corporations to elect to determine the business income of their combined reporting group on a “water's-edge” basis. In general, the water’s-edge method excludes foreign corporations from the calculation of business income. An exception to this general rule is a CFC with subpart F income. The income and factors of the CFC are included in a water's-edge combined report based on the CFC's inclusion ratio. This ratio is equal to the CFC’s current year subpart F income divided by the CFC’s current year earnings and profits. While California does not conform to the subpart F scheme of the IRC, for purposes of computing the CFC's inclusion ratio under water's-edge, California incorporates the federal definitions of "subpart F income" and "earnings and profits" as applicable for federal income tax purposes for the same taxable year.

Generally, rather than computing a dividends-received deduction using federal dividends received deduction (DRD) provisions, dividends paid to the water's-edge combined reporting group from foreign affiliates are income on the water's-edge combined report and California taxpayers electing water's-edge treatment are generally entitled to a 75 percent DRD on such dividends under RTC section 24411.

As a result, California does not conform to the changes made by this provision.

An applicable taxpayer is required to pay a tax equal to the Base Erosion Minimum Tax (BEMT) amount for the taxable year. Under this provision, the BEMT amount is the excess of 10.5 percent of the modified taxable income of the taxpayer for the taxable year over an amount equal to the regular tax liability (defined in Internal Revenue Code (IRC) section 26(b)) of the taxpayer for the taxable year reduced (but not below zero) by the excess (if any) of the credits allowed under Chapter 1 against such regular tax liability over the sum of: (1) the credit allowed under IRC section 38 for the taxable year which is properly allocable to the research credit determined under IRC section 41(a), plus (2) the portion of the applicable IRC section 38 credits not in excess of 80 percent of the lesser of the amount of such credits or the BEMT amount (determined without regard to this clause).

This provision repeals the modifications established under the Tax Cuts and Jobs Act (Public Law 115-97, section 14401), including repealing the increase in the percentage of modified taxable income used to calculate the BEMT from 10 percent to 12.5 percent and instead replaced 10 percent with 10.5 percent, redesigned several subsections and made other technical changes to conform to the amendments under this section.

California does not have a tax comparable to the tax imposed under IRC section 59A, relating to tax on base erosion payments of taxpayers with substantial gross receipts. As a result, California does not conform to the changes made by this provision.

This provision would require taxpayers to calculate their business interest deduction limitation on (1) business interest income; (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year; and (3) the floor plan financing interest of the taxpayer for the taxable year (Internal Revenue Code (IRC) section 163(j), regardless of whether the taxpayer deducts or capitalizes such business interest. In addition, the provision provides that the amount of allowable business interest deduction would be applied first to the aggregate amount to business interest that would otherwise be capitalized, and the remainder (if any) would be applied to the aggregate amount of business interest that would be deducted.

In general, any carryforward business interest allowed under this provision would not be treated as interest to which an interest capitalization provision applies. This provision adds and defines the term “interest capitalization provision” to mean any interest that is required to be charged to a capital account or may be deducted or charged to a capital account.

This provision also modifies the definition of “business interest,” for purposes of calculating the business interest limitation, to mean any interest paid or accrued on indebtedness properly allocable to a trade or business, except for investment interest or any capitalized interest. For purposes of this provision, “investment interest” is defined as any interest paid or accrued allowed as a deduction on indebtedness properly allocable to property held for investment (IRC section 163(d)). Capitalized interest includes (1) interest and carrying charges properly allocable to personal property which is part of a straddle (IRC section 263(g)) or (2) interest paid or incurred during a production period for real or tangible property produced by a taxpayer that has a long useful life, an estimated production period exceeding 2 years, or an estimated production period exceeding 1 year and estimated cost of $1,000,000 (IRC section 263A(f)).

The provision also provides that the Secretary will issue regulations or guidance as may be necessary to carry out the purpose of these provisions, including regulations or guidance to determine which business interest will be taken into account for purposes of these provisions and when determining which portion of the deduction will be allocated to related and nonrelated parties (IRC section 59A(c)(3)).

California conforms, under the Personal Income Tax Law to the federal rules for the deduction of interest under IRC section 163, as of the specified date of January 1, 2025. As a result, California does not conform to the changes made by this provision under the PITL.

Under the Corporation Tax Law (CTL), to the federal rules for the deduction of interest under IRC section 163, as of the specified date of January 1, 2025, with modifications, but does not conform to the federal limitations on deductions of business interest . As a result, California does not conform to the changes made by this provision under the CTL.

The estimated revenue impact to conform to the above provisions would result in the following gain:

This provision modifies the definition of adjusted taxable income, for purposes of computing the business interest deduction limitation, to disregard amounts included in gross income from subpart F income of a United States (U.S.) shareholder (Internal Revenue Code (IRC) section 951), the net controlled foreign corporation (CFC) tested income of a U.S. shareholder (IRC section 95A), and any gross up amount treated as a dividend received from a CFC with respect to which the U.S. corporation is a U.S. shareholder (IRC section 78).

California conforms, under the Personal Income Tax Law to the federal rules for the deduction of interest under IRC section 163, as of the specified date of January 1, 2025. As a result, California does not conform to the changes made by this provision under the PITL.

Under the Corporation Tax Law (CTL), to the federal rules for the deduction of interest under IRC section 163, as of the specified date of January 1, 2025, with modifications, but does not conform to the federal limitations on deductions of business interest. As a result, California does not conform to the changes made by this provision under the CTL.

The estimated revenue impact to conform to the above provisions would result in the following gain:

This provision makes permanent the look-thru rules for related CFCs. For purposes of this provision, foreign base company income for a taxable year consists of foreign personal holding company income, which includes passive income such as dividends, interest, rents, royalties and annuities, foreign base company sales income, and foreign base company services income (Internal Revenue Code (IRC) section 954).

The look-thru rules for related CFCs do not treat dividends, interest, rents, and royalties received or accrued from a CFC from a related party as foreign personal holding company income to the extent the income is attributable and properly allocable to the income of the related person with is neither subpart F income (IRC section 951) or income treated as effectively connected of trade of business in the United States (IRC section 864(c)).

California does not conform to subpart F (sections 951 to 965) of the IRC, relating to CFCs, except to the extent applicable with respect to filings under a water’s-edge election. As a result, California does not conform to the changes made by this provision.

This provision repeals the election that allowed a specified foreign corporation to elect, in lieu of the taxable year of the majority United States (U.S.) shareholder’s taxable year, a taxable year beginning 1 month earlier than the majority U.S. shareholder’s taxable year. For purposes of this provision, a specified foreign corporation is a controlled foreign corporation (CFC) under the subpart F regime in which a U.S. shareholder owns more than 50 percent of the voting power of all classes of stock of such corporation entitled to vote or the total value of stock of such corporation (Internal Revenue Code (IRC) section 898(b)).

This provision provides that any corporation that is a specified foreign corporation as of November 30, 2025 will be required to begin its first taxable year after November 30, 2025 and its taxable year would end at the same time as its majority U.S. shareholder or if there is no majority U.S. shareholder year, the taxable year would be the year prescribed under the regulations. In addition, if any specified foreign corporation is required by the amendments to change its taxable year for its first taxable year after November 30, 2025, then such change would be treated as if initiated by such corporation and would be treated as having been made with consent of the Secretary of the Treasury.

California does not conform to subpart F (sections 951 to 965) of the IRC, relating to CFCs, except to the extent applicable with respect to filings under a water’s-edge election.

As a result, California does not conform to the changes made by this provision.

Federal law provides rules to determine stock ownership of a corporation, including requirements for direct ownership, indirect ownership, and constructive ownership, to determine whether a foreign corporation is a foreign owned controlled foreign corporation (CFC) and for purposes of determining the amounts includable in a United States (U.S.) shareholder’s gross income from a foreign owned CFC.

Prior to the Tax Cuts and Jobs Act (TCJA) (Public Law (P.L.) 115-97), for purposes of determining constructive ownership, federal law prohibited downward attribution, meaning that certain stock of a foreign corporation owned by a foreign person was not attributed to a related U.S. person for purposes of determining whether the related U.S. person was a U.S. shareholder of the foreign corporation and whether the foreign corporation was a CFC. In 2017, the TCJA (P.L. 115-97, section 14213) amended the constructive ownership rules of Internal Revenue Code (IRC) section 958(b) to repeal that prohibition on downward attribution.

This provision amends the ownership attribution rules of IRC section 958(b) to restore the prohibition on downward attribution of stock ownership of IRC section 958(b)(4) that was repealed by the TCJA (P.L. 115-97, section 14213). It also adds to subpart F, IRC section 951B, the income inclusion rules that would be applied with respect to such U.S. shareholders of a foreign owned CFC.

In addition, the provision defines a “foreign controlled United States shareholder” with respect to any foreign corporation, if a U.S. shareholder with respect to such foreign corporation (1) owns 50 percent or more of the foreign corporation, and (2) the IRC section 958(b) constructive ownership rules were applied without regard to IRC section 318(a)(3)(A),(B), and (C) that apply to a person who is not a U.S. person.

The provision also defines “foreign controlled foreign corporation” as a foreign corporation, other than a CFC, which would be a CFC if the CFC definition of IRC section 957(a) was satisfied with ownership of “foreign controlled United States shareholders,” rather than “United States shareholders."

California conforms to the changes to IRC section 958, but does not conform to the changes to IRC section 951B.

Worldwide Unitary Method

California corporate taxpayers doing business both within and without California are required to compute their California franchise or income tax using the worldwide unitary method. Under this method, a corporate taxpayer's business income from both domestic and foreign unitary operations is considered in the calculation of the taxpayer's tax base, and a share of that business income is then “apportioned” to California using a formula. Income apportioned to California is subject to California franchise or income tax. The formula measures relative levels of business activity in the state by using the amount of the taxpayer’s sales in California divided by the taxpayer's sales everywhere. This measure of activities is commonly called the “single sales-factor formula.” The amount of sales from both domestic and foreign activities are included in the calculation of the apportionment formula. Generally, dividends paid from one member to another within the unitary group from unitary earnings are eliminated from tax computations under Revenue and Taxation Code (RTC) section 25106.

California Water's-Edge Election

As an alternative to the worldwide unitary method, California law allows corporations to elect to determine the business income of their combined reporting group on a “water's-edge” basis. In general, the water’s-edge method excludes foreign corporations from the calculation of business income. An exception to this general rule is a CFC with subpart F income. The income and factors of the CFC are included in a water's-edge combined report based on the CFC's inclusion ratio. This ratio is equal to the CFC’s current year subpart F income divided by the CFC’s current year earnings and profits.

While California does not conform to the subpart F scheme of the IRC, for purposes of computing the CFC's inclusion ratio under water's-edge, California incorporates the federal definitions of a “controlled foreign corporation,” “subpart F income” and “earnings and profits ” as applicable for federal income tax purposes for the same taxable year. This is limited to provisions of the IRC referred to in the water's-edge election provisions that are not otherwise applicable for California franchise or income tax purposes.

RTC section 25110 specifically refers to ""controlled foreign corporation"" as defined in IRC section 957. IRC section 957 applies the stock ownership rules under IRC section 958 to determine if a foreign corporation meets the U.S. shareholder ownership requirement to be a controlled foreign corporation. As a result, the new ownership attribution rule is applicable with respect to water's-edge elections for taxable years of foreign corporations beginning after December 31, 2025, and for taxable years of U.S. shareholders in which or within which such taxable years of foreign corporations end.

California does not conform to the provisions of Section 951B.

Federal law provides income reporting rules for U.S. shareholders of a CFC. This provision provides that if a foreign corporation is a CFC at any time during the taxable year, each U.S. shareholder that owns stock in such corporation on any day during the CFC taxable year, is required to include in the U.S. shareholder’s gross income its pro rata share of the corporation’s subpart F income for the CFC’s taxable year as determined by the portion of such income that is attributable to the stock of such corporation owned by the shareholder and any period of the CFC year during which the shareholder owned the stock, such shareholder was a U.S. shareholder, and such corporation was a CFC. Each U.S. shareholder that owns stock in such corporation on the last day of the CFC taxable year, is required to include in the U.S. shareholder’s gross income its pro rata share of any amount as determined under IRC section 956 with respect to investment of earnings in U.S. property.

This provision also provides that any amount required to be included in gross income by a U.S. shareholder shall be included in gross income for the U.S. shareholder’s taxable year that includes the last day on which the shareholder owns (within the meaning of IRC section 958(a)) stock in the CFC during such CFC taxable year.

California does not conform to the changes to IRC sections 951, 951A, or 956.

Worldwide Unitary Method

California corporate taxpayers doing business both within and without California are required to compute their California franchise or income tax using the worldwide unitary method. Under this method, a corporate taxpayer's business income from both domestic and foreign unitary operations is considered in the calculation of the taxpayer's tax base, and a share of that business income is then “apportioned” to California using a formula. Income apportioned to California is subject to California franchise or income tax. The formula measures relative levels of business activity in the state by using the amount of the taxpayer’s sales in California divided by the taxpayer's sales everywhere. This measure of activities is commonly called the “single sales-factor formula.” The amount of sales from both domestic and foreign activities are included in the calculation of the apportionment formula. Generally, dividends paid from one member to another within the unitary group from unitary earnings are eliminated from tax computations under Revenue and Taxation Code (RTC) section 25106.

California Water's-Edge Election

As an alternative to the worldwide unitary method, California law allows corporations to elect to determine the business income of their combined reporting group on a “water's-edge” basis. In general, the water’s-edge method excludes foreign corporations from the calculation of business income. An exception to this general rule is a CFC with subpart F income. The income and factors of the CFC are included in a water's-edge combined report based on the CFC's inclusion ratio. This ratio is equal to the CFC’s current year subpart F income divided by the CFC’s current year earnings and profits. While California does not conform to the subpart F scheme of the IRC, for purposes of computing the CFC's inclusion ratio under water's-edge, California incorporates the federal definitions of "subpart F income" and "earnings and profits" as applicable for federal income tax purposes for the same taxable year.

Generally, rather than computing a dividends-received deduction using federal dividends received deduction (DRD) provisions, dividends paid to the water's-edge combined reporting group from foreign affiliates are income on the water's-edge combined report and California taxpayers electing water's-edge treatment are generally entitled to a 75 percent DRD on such dividends under RTC section 24411.

In addition, California does not conform to IRC section 956 with respect to investment of earnings in U.S. property.

This provision modifies the employer-provided child care credit by increasing the percentage of qualified child care expenditures eligible for the credit from 25 percent to 40 percent. For eligible small businesses, the percentage of qualified child care expenditures is increased to 50 percent.

The provision increases the maximum credit amount to $500,000 and in the case of an eligible small business, the limit is increased to $600,000; these limits would be adjusted for inflation annually for taxable years beginning after 2026. Beginning after 2026, the credit amounts of $500,000 and $600,000, would be adjusted using a cost-of-living calculation.

This provision expands the definition of “eligible small business” to include a business that meets the gross receipts test under IRC section 448(c), meaning that the average annual gross receipts for the partnership or corporation do not exceed $25,000,000, adjusted for inflation after 2018. The adjusted amount for 2025 was $31,000,000. This provision, for purposes of this credit, modifies the gross receipts test to include the previous five-taxable-year period, instead of three taxable year.

This provision expands qualified child care expenditures allowed under a contract with a qualified child care facility to also include contracts with an intermediate entity that contracts with one or more qualified child care facilities to provide child care services. Additionally, this provision expands eligible child care facilities to include facilities that are jointly owned or operated. The Secretary of the Treasury is required to issue regulations or other guidance that may be necessary to carry out these two amendments to the credit.

California does not conform to the employer-provided child care credit.

The provision modifies the adoption credit by allowing refundability of up to $5,000 of allowable adoption expenses paid or incurred by the taxpayer and excludes refunded adoption credits from credit amounts eligible to be carried forward for use in succeeding taxable years.

This provision provides that the credit amount eligible for refundability would be adjusted annually for inflation.

California does not conform to IRC section 23, relating to adoption expenses.

California has a standalone adoption credit, which allows a credit equal to 50 percent (not to exceed $2,500) of the cost of adopting a minor child who is an American citizen and is in the custody of a California public agency or a political subdivision of California. The credit is claimed in the taxable year in which the decree or order of adoption is entered, although qualifying costs paid or incurred in prior years can qualify for the credit.

Under the current adoption credit only a state determines whether a child has special needs.

This provision would allow an Indian tribal government to also make such determination.

California does not conform to IRC section 23, relating to adoption expenses.

California has a standalone adoption credit, which allows a credit equal to 50 percent (not to exceed $2,500) of the cost of adopting a minor child who is an American citizen and is in the custody of a California public agency or a political subdivision of California. The credit is claimed in the taxable year in which the decree or order of adoption is entered, although qualifying costs paid or incurred in prior years can qualify for the credit.

This provision modifies the employer-provided dependent care assistance program by increasing the amount eligible for the gross income exclusion from $5,000 ($2,500 in case of a separate return by a married individual) to $7,500 ($3,750 in the case of a separate return by a married individual).

California conforms to the employer-provided dependent care assistance exclusion from gross income as of the specified date of January 1, 2025, without any modifications. As a result, California does not conform to the federal provision that increases the employer-provided dependent care assistance exclusion amount because this change was made after the specified date of January 1, 2025.

The child and dependent care credit is for employment-related expenses paid during a taxable year, calculated as a percentage of eligible expenses that are limited to $3,000 for 1 qualifying individual and $6,000 for 2 or more qualifying individuals.

This provision increases the applicable percentage for employment-related expenses from 35 percent to 50 percent. The provision also modifies the two-part phase out applicable to the 50 percent credit rate. Under the first part, the 50 percent credit rate is reduced, but not below 35 percent, by 1 percentage point for each $2,000, or fraction thereof, of adjusted gross income (AGI) above $15,000. Under the second part, the 35 percent credit rate "floor" is reduced, but not below 20 percent, by 1 percentage point for each $2,000 ($4,000 in the case of a joint return), or fraction thereof, of AGI above $75,000 ($150,000 in the case of a joint return).

California automatically conforms to the child and dependent care credit, with modifications and these changes impact the computation of the California credit.

The California child and dependent care credit is allowed based on a percentage of the taxpayer’s federal child and dependent care tax credit for the taxable year. The percentages are:

The credit is limited to household services and care provided within California.

The provision provides an income tax credit, limited to $1,700 per taxable year, to individual taxpayers that make a charitable cash contribution to an eligible organization that uses the contributions to grant scholarships for eligible students. The credit is required to be reduced by any amount allowed as a state tax credit for contributions made by the taxpayer during the taxable year. Additionally, any contributions for which the new credit is allowed is not considered for purposes of calculating the taxpayer’s charitable contribution deduction. The credit may be carried over for a maximum of five taxable years.

The provision requires an eligible, tax-exempt scholarship granting organization to (1) provide scholarships to 10 or more students who do not all attend the same school, (2) use 90 percent of the organization’s income on scholarships, (3) limit grants to qualified elementary or secondary education expenses, and (4) provide preference to prior year recipients and recipients with siblings, among additional requirements.

A student, scholarship recipient, must be eligible to enroll in a public elementary or secondary school and report prior year household income not to exceed 300 percent of the area median gross income.

The provision provides a gross income exclusion to the individual or dependent of that individual for scholarships received for qualified elementary or secondary education expenses of an eligible student, provided by a scholarship granting organization.

California does not conform to the tax credit for contributions to scholarship granting organizations.

California conforms by reference to Part III of Subchapter B of Chapter 1 of Subtitle A of the IRC, relating to items that are specifically excluded from gross income, as of the specified date of January 1, 2025, in RTC section 17131. As a result, California does not conform to the gross income exclusion for scholarships for qualified elementary or secondary education expenses.

The estimated revenue impact to conform to the above provision would result in the following loss:

This provision permanently enables employers to provide a student loan repayment benefit to employees on a tax-free basis. The repayment benefit was temporary under the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) (Public Law (P.L.) 116-136, section 2206) for payments made after March 27, 2020 and before January 1, 2021, and the Consolidated Appropriations Act, 2021 (P.L. 116-260, section 120) extended the provision through 2025.

This provision makes the exclusion permanent, applicable to payments made by an employer on behalf of an employee after December 31, 2025. Under the provision, an employer may contribute up to $5,250 annually toward payment of an employee’s student loans, and such contribution would be excluded from the employee’s income. The $5,250 cap applies to both the student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer.

Additionally, beginning in taxable year 2025, the provision provides an inflation, cost-of-living adjustment for the $5,250 income exclusion cap.

California does not conform to federal rules relating to educational assistance programs under IRC section 127, but has stand-alone language in RTC section 17151 that allows for an exclusion from gross income of an employee for amounts paid or incurred by their employer, not to exceed $5,250, for education assistance pursuant to an educational assistance program, similar to IRC section 127. As a result, California does not conform to IRC section 127 federal exclusion for certain employer educational assistance, including payments of student loans, or the inflation adjustment to the income exclusion cap.

The provision expands the type of expenses eligible for an IRC section 529 distribution. Under the Tax Cuts and Jobs Act (Public Law 115-97, section 11032), a distribution was previously limited to tuition expenses in connection with the enrollment or attendance of the designated beneficiary at a public, private, or religious elementary or secondary school. Under the provision, in addition to tuition expenses, qualified higher education expenses, for an elementary or secondary private, public, or religious school, also includes expenses for curriculum and curricular materials, books or other instruction materials, online educational materials, tuition for specified tutoring or educational classes, fees for specified examinations, fees for dual enrollment in an institution of higher education, and specified educational therapies for students with disabilities.

The provision increases the IRC section 529 plan distribution limit from $10,000 to $20,000, for eligible expenses incurred during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis.

California law, under the PITL and the CTL, conforms to IRC section 529, relating to qualified tuition programs, as of the specified date of January 1, 2025, with modifications, and does not conform to IRC section 529 account funding for elementary and secondary education. As a result, CA does not conform to the provision’s new federal rules relating to expanded qualified expenses or to the increased maximum distribution amount.

Applies to distributions made after 07/04/2025.

The provision provides that qualified postsecondary credentialing expenses are to be treated as qualified higher education expenses eligible for an IRC section 529 distribution. The provision defines eligible postsecondary credentialing expenses to include tuition, fees, books, supplies, and equipment required for enrollment or attendance at a recognized, postsecondary credential program, and any other expense incurred in connection with enrollment or attendance at a recognized postsecondary credential program if the expense would be considered a higher education expense if incurred in connection with enrollment or attendance at an eligible education institution. Qualified postsecondary credentialing expenses also include fees for testing if it is required to obtain or maintain a recognized postsecondary credential, and fees for continuing education is required to maintain a recognized postsecondary credential.

Recognized postsecondary credential means a credential that is issued by a program accredited by the Institute for Credentialing Excellence, the National Commission on Certifying Agencies, or the American National Standards Institute, as well as any program included in the Credentialing Opportunities On-Line directory maintained by the Department of Defense or any branch of the Armed Forces, or programs identified by the Secretary.

California law, under the PITL and the CTL, conforms to IRC section 529, relating to qualified tuition programs, as of the specified date of January 1, 2025, with modifications, and does not conform to IRC section 529 rules relating to postsecondary credentialing expenses. As a result, CA does not conform to the provision’s new federal rules for treating postsecondary credentialing expenses as qualified higher education expenses.

The California Kids Investment and Development Savings Program (CalKIDS), administered by the Scholarshare Investment Board, authorizes low-income individuals to establish accounts in accordance with IRC section 529 for qualified higher education expenses, as defined in IRC section 529. The CalKIDS program allows for an exclusion from gross income for funds deposited and investment returns accrued in a CalKIDS account. The CalKIDS program conforms to federal amendments to the IRC if the Scholarshare Investment Board determines that the IRC amendment is consistent with the purposes of the CalKIDS program. If the Scholarshare Investment Board determines that the amendment to the definition of qualified higher education expenses to include qualified postsecondary credentialing expenses as eligible for an IRC section 529 distribution furthers the purposes of the CalKIDS program, the board may conform to those provisions.

The estimated revenue impact to conform to the above provision would result in the following loss:

Previously, the Tax Cuts and Jobs Act (Public Law 115-97, section 13701) added a federal law that imposed an excise tax on an applicable educational institution for each taxable year equal to 1.4 percent of the net investment income of the institution for the taxable year.

This provision replaces the 1.4 percent excise tax with a tiered percentage of the net investment income of the institution for the taxable year based on an institution’s student adjusted endowment amounts as follows:

• 1.4 percent for an institution with a student adjusted endowment of at least $500,000 and not in excess of $750,000,
• 4 percent for an institution with a student adjusted endowment in excess of $750,000 and not in excess of $2,000,000 and
• 8 percent for an institution with a student adjustment endowment in excess of $2,000,000.

This provision also modifies the definition of an applicable educational institution as an institution: (1) that has at least 3,000 (previously 500) students during the preceding taxable year; (2) that is an eligible educational institution as described in section 25A of the IRC; (3) that is not described in the first section of section 511(a)(2)(B) of the IRC (generally describing State colleges and universities); (4) has student adjusted endowments of at least $500,000; and (5) more than 50 percent of the students of which are located in the United States. For this purpose, the number of students at a location is based on the daily average number of full-time students attending the institution, with part-time students being taken into account on a full-time student equivalent basis.

The excise tax is calculated as a percent of net investment income and is determined using rules similar to the rules of IRC section 4940(c) (relating to the net investment income of a private foundation). The provision provides that the computation of net investment income includes student loan interest and federally subsidized royalty income.

For purposes of determining whether an institution meets the student adjusted endowment asset threshold and determining net investment income, assets and net investment income include amounts with respect to an organization that is related to the institution. An organization is treated as related to the institution for this purpose if the organization: (1) controls, or is controlled by, the institution; (2) is controlled by one or more persons that control the institution; or (3) is a supported organization or a supporting organization during the taxable year with respect to the institution. In addition, (1) no such amount is taken into account with respect to more than one educational institution; and (2) unless the related organization is controlled by the educational institution or is a supporting organization (described in IRC section 509(a)(3)) with respect to the institution for the taxable year, assets and investment income that are not intended or available for the use or benefit of the educational institution are not taken into account.

The provision provides that the Secretary would promulgate regulations or other guidance necessary to prevent avoidance of the tax under this provision, including regulations or other guidance to prevent tax avoidance by restructuring of endowment funds or other arrangements to reduce or eliminate net investment income.

The provision would additionally require each applicable educational institution exempt from taxation under IRC section 501(a) to include on its annual return the number of tuition-paying students taken into account for purposes of the excise tax and the number of students of the institution calculated in accordance with the excise tax.

The FTB does not administer these types of excise taxes.

Previously, the Tax Cuts and Jobs Act (Public Law 115-97, section 13602) added a federal law that imposes an excise tax on an applicable tax-exempt organization for remuneration paid to covered employees computed on the remuneration paid in excess of $1 million, plus any excess parachute payments. Specifically, the excise tax is equal to 21 percent, and is imposed on (1) remuneration (excluding any excess parachute payment) paid in any taxable year by an applicable tax-exempt organization to a covered employee that exceeds $1 million, plus (2) any excess parachute payment paid by an applicable tax-exempt organization to any covered employee, as defined.

A covered employee was defined as any current or former employee of an applicable tax-exempt organization if the employee is (1) one of the five highest compensated employees of the organization for the tax year, or (2) was a covered employee of the organization, or any predecessor of the organization.

This provision modifies the definition of covered employee to provide that the excise tax applies to any employee, including any former employee who was an employee of the organization, or of a predecessor organization, during any taxable year beginning after December 31, 2016.

The FTB does not administer these types of excise taxes.

California does not conform to the deferral and exclusion of capital gains reinvested or invested in qualified opportunity zone funds under IRC sections 1400Z-1 and 1400Z-2 and does not conform to the changes made by OBBBA to these provisions.

California law provides, under the AFITL, that the FTB may require a copy of any information return required to be filed with the Secretary of the Treasury and enacted on or after January 1, 2009, at the time and in the form and manner as the FTB may, by forms and instructions, require.

California does not conform to the new section that added information reporting requirements penalties for any person required to file an annual return on behalf of a qualified fund under IRC section 6039K. However, California has standalone penalties provisions that are imposed for the failure to file correction information returns and payee statements required under the AFITL. These penalties are determined in accordance with IRC sections 6721 and 6722.

The provision permanently increases a state’s housing credit ceiling for the low-income housing credit (LIHC) for calendar years beginning after December 31, 2025.

This provision modifies the special rule for a building financed with tax exempt bonds, to allow the LIHC without regard to the amount allocated for a building if:

• 50 percent or more the aggregate basis of such a building and the land on which the building is located is financed by 1 or more obligations where interest from a private activity bond (IRC section 146) or state or local bond (IRC section 103) is exempt from taxation, or
• 25 percent or more the aggregate basis of such building and the land on which the building is located is financed by 1 or more obligations where interest from a private activity bond (IRC section 146) or state or local bond (IRC section 103) is exempt from taxation, was issued after December 31, 2025 and provided the financing is not less than 5 percent of the aggregate basis of such building and land.

For purposes of applying the special rule for a building financed with tax exempt bonds, any rehabilitation expenditure of a building that is treated as a separate new building, both the existing building and the new building shall be treated as being placed in service on the close of the 24-month period under IRC section 42(e)(4).

Under the PITL and CTIL, California generally conforms by reference to the LIHC, with modifications, such as:

• The LIHC is claimed over 4 years vs 10 years for federal,
• Limited to projects in California,
• Must be allocated and authorized by the California Tax Credit Allocation Committee (CTCAC),
• Rents must be maintained at low-income levels for 30 years (15 years for federal), and
• CTCAC must have authorized a federal credit to the taxpayer, or the taxpayer must qualify for the federal credit.

California law conforms by reference to the changes made by this provision.

This provision makes permanent the $5,000,000,000 new markets tax credit limitation for each calendar year after 2019, which was to sunset after 2025.

This provision limits the carryover period for any unused portion of new markets tax credit to 5 years from the year in which the excess credit occurred. In addition, any unused carryover credit generated prior to 2026 shall be treated as if it occurred in 2025.

California does not conform to the federal new markets tax credit under IRC section 45D and has no comparable credit. As a result, California does not conform to the changes made by this provision.

This provision increases the deduction for charitable contributions made in cash for individuals who do not elect to itemize to $1,000 ($2,000 in case of a joint return). In addition, this provision makes the deduction for individuals who did not itemize permanent for taxable years beginning after December 31, 2025.

California generally conforms, under the PITL, to the federal charitable contribution rules under IRC section 170 as of the specified date of January 1, 2025, and as a result, does not conform to the increased limitation for certain charitable contributions.

This provision adds a floor limitation for charitable contributions made by an individual. This provision additionally limits the charitable contribution deduction to the extent the contribution exceeds 0.5 percent of an individual’s contribution base, generally adjusted gross income (AGI) computed without regard to net operating loss carrybacks, for the taxable year. In addition, this provision provides rules for the order in which the individual’s contributions are taken into account.

This provision also provides in years in which contributions exceed a charitable deduction limitation the deduction disallowed by the 0.5 percent floor may be carried forward for the succeeding 5 taxable years, subject to limitations.

This provision makes permanent 60 percent cash charitable contribution celling to charities for taxable years beginning after December 31, 2017, which was to sunset after 2025. It also modifies the limitation to allow cash contribution payments made to charities to the extent the contributions do not exceed the excess of 60 percent of the individual’s contributions for the taxable year over the aggregate amount of contributions over such year.

California generally conforms, under the PITL, to the federal charitable contribution rules under IRC section 170 as of the specified date of January 1, 2025, with modifications, and as a result, does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following gain:

This provision adds a floor limitation for charitable contributions made by a corporation. This provision limits the charitable contribution deduction to the extent the contribution exceeds 1 percent of the corporation’s taxable income.

This provision adds a 5-year carryforward for disallowed charitable contributions that exceeded the 10 percent maximum taxable income threshold or did not exceed the 1percent taxable income floor. For purposes of the contribution deduction disallowed due to the 1 percent floor, the disallowed deduction may be carried forward only if the aggregate contributions also exceed the 10 percent ceiling. This provision also adds special rules for net operating loss carryovers.

California has stand-alone law, under the CTL, for corporate charitable contribution deductions that is generally similar to the federal law allowing corporations a deduction for charitable contributions. California incorporates some of the federal contribution rules by reference, as of January 1, 2025, including IRC section 170(d)(2), which includes the 5-year carry forward. In general, in any taxable year, charitable contributions by a corporation are not deductible to the extent the aggregate contributions exceed 10 percent of the corporation's net income computed without regard to net operating or capital loss carrybacks, and any excess may be carried forward for up to five years. As a result, California does not conform to the increased limitation for certain charitable contributions for corporations.

This provision permanently increases the limitation on the cover over amount paid to Puerto Rico and the Virgin Islands from the excise tax imposed on distilled spirits imported into the United States from Puerto Rico and the Virgins Islands from $10.50 to $13.25 per proof gallon.

FTB does not administer these types of excise taxes.

This provision provides that certain activities substantially related to the participation or investment in fisheries in the Bering Sea and Aleutian Islands regions carried out by eligible Alaskan villages listed under the Magnuson-Stevens Fishery Conservation and Management Act, are considered qualifying activities for constituting the basis of such entity’s federal income tax exemption status under IRC section 501(a).

In addition, a wholly owned subsidiary that transfers its assets from a trade or business related to the participation or investment in fisheries in the Bering Sea and Aleutian Islands regions to an eligible entity listed under the Magnuson-Stevens Fishery Conservation and Management Act, no later than 18 months after July 4, 2025, will not recognize gain or income from the transfer of the assets and all income from the transfer is exempt from taxation.

California, under the PITL and CTL, does not conform to IRC section 501 but instead has standalone law that is generally similar to federal law. As a result, California does not conform to the changes made under this provision.

This provision increases the expenses paid limitation from $10,000 to $50,000 applicable to treat certain expenses paid by whaling captains charged with the responsibility of maintaining and carrying out sanctioned whaling activities as a charitable contribution.

California generally conforms, under the PITL, to the federal charitable contribution rules under IRC section 170 as of the specified date of January 1, 2025, with modifications, and as a result, does not conform to the increased limitation for expenses paid by certain whaling captains in support of Native Alaskan subsistence whaling.

The estimated revenue impact to conform to the above provisions would result in the following loss:

This provision replaces the term “home construction contract” with “residential construction contract” as a category of construction project exempted from the percentage of completion method of accounting for the purposes of what taxable year to include the taxable income from a long-term contract in, and as it applies to the treatment of certain long-term contracts for purposes of determining alternative minimum taxable income.

This provision would also exempt a residential construction contract that is not a home construction contract from the application of IRC section 263A if it meets the gross receipts test of IRC section 448(c) for the taxable year the contract is entered into and is estimated to be completed with the three-year period beginning on the contract commencement date, instead of the two-year period that applies to home construction and other specified construction contracts.

California generally conforms, under the PITL and CTL, to the federal long-term contract rules under IRC sections 56 and 460 as of the specified date of January 1, 2025, with modifications, and as a result, does not conform to the changes under this provision for residential construction contracts.

A taxpayer other than a corporation can exclude a percentage of the gain from the sale of certain qualified small business stock (QSBS) acquired at original issue and held for at least five years.

Under prior federal law, the amount of gain eligible for the exclusion by an individual with respect to the stock of any corporation was the greater of (1) ten times the taxpayer’s basis in the stock or (2) $10 million (reduced by the amount of gain eligible for exclusion in prior years). Also under prior federal law, to qualify as a small business, when the stock was issued, the aggregate gross assets (i.e., cash plus aggregate adjusted basis of other property) held by the corporation could not exceed $50 million. Different percentages applied depending on whether the QSBS was in an empowerment zone business or on the date of acquisition.

This provision creates new thresholds related to the percentage of the gain eligible for the gross income exclusion when the stock is held for at least 3 years. The eligible percentages are as follows:

• 50% when stock is held for 3 years
• 75% when held for 4 years, and
• 100% when held for 5 years or more

In addition, this provision modifies the applicable dollar limitation on eligible gain from one or more dispositions of stock for the taxable year, from $10 million to $15 million, for stock acquired after July 4, 2025. Additionally, this provision increases the aggregate gross asset limitation from $50 million to $75 million. These modified limitations are to be adjusted annually by inflation beginning in 2027.

California does not conform to the federal small business stock exclusion. As a result, California does not conform to the changes made by this provision.

The provision modifies the information reporting requirement for third party settlement organizations not to require reporting on third party network transactions of participating payees if the amount that would be required to be reported is $20,000 or less and the aggregate number of transactions do not exceed 200. Third party settlement organizations were previously not required to report unless reportable transactions exceeded $600 dollars.

The provision also provides that for backup withholding purposes, reportable payments include payments in settlement of third-party network transactions when the aggregate transactions exceed information reporting thresholds of $20,000 and the aggregate number of transactions exceed 200.

California does not conform to Internal Revenue Code (IRC) sections requiring information returns to be filed, but instead provides that the Franchise Tax Board (FTB) may require a copy of any information return required to be filed with the Secretary under IRC section 6050W at the time and in the form and manner as the FTB may, by forms and instructions, require.

For calendar years beginning after December 31, 2021, any information returns filed under IRC section 6050W that are required to be filed for California purposes would include the information as modified by this federal act.

Under the PITL, California generally conforms by reference with modifications to the federal rules related to backup withholding under IRC section 3406 as of the specified date of January 1, 2025. California does not conform to the exclusion from backup withholding for reportable payments that are in settlement of a third-party network transaction that exceed $20,000 and 200 transactions. Therefore, backup withholding would be required for settlement of third-party network transactions reportable payments of more than $600.

The provision modifies the information reporting requirement for reporting information at source and for payments of remuneration for services. The reporting threshold is increased from $600 to $2,000 and applies when (1) persons engaged in a trade or business make payments in the course of such trade or business to another person and (2) when a person engaged in a trade or business pays remuneration to any person for services. The provision also requires the threshold amount for reportable payments to be increased by the cost-of living adjustment.

Additionally, the increased reporting threshold also applies to backup withholding rules when the aggregate payments exceed information reporting thresholds of $2,000.

California does not conform to Internal Revenue Code (IRC) sections requiring information returns to be filed but instead provides that the Franchise Tax Board (FTB) may require a copy of any information return required to be filed with the Secretary under IRC section 6041 and 6041A, at the time and in the form and manner as the FTB may, by forms and instructions, require.

Any information returns filed under IRC section 6041 and 6041A that are required to be filed for California purposes would include the information as modified by this federal act.

Under the PITL, California generally conforms January 1, 2025. California does not conform to the exclusion from backup withholding for reportable payments that do not exceed the $2,000 threshold under IRC section 6041 and 6041A. Therefore, for purposes of backup withholding, the $600 threshold would continue to apply for California purposes for these payments.

This provision adds “qualified sound recording production” to the list of expenses, up to $150,000 per year, that a taxpayer can elect to treat as a deduction. Any qualified sound recording production costs a taxpayer elects be taken as a deduction, would not be allowed a deprecation or amortization deduction.

This provision defines the term “qualified sound recording production” to mean sound recordings that are made from the fixation of a series of musical, spoken, or other sounds, not including sounds accompanied by a motion picture or other audio-visual work, produced and recorded in the United States as defined under Title 17 of the United State Code Section 101. The fixation of a series of musical, spoken, or other sounds, not including sounds accompanied by a motion picture or other audio-visual work, produced and recorded in the United States as defined under Title 17 of the United State Code Section 101.

This provision adds qualified sound recording productions to qualified property for purposes of the special allowance rules for bonus deprecation. For purposes of this provision, the place in service date for a qualified sound recording production asset will be the date of initial release or broadcast.

Under the PITL, for taxable years beginning on or after January 1, 2025, California law, as it relates to the Modified Accelerated Recovery System (MACRS) in general, conforms to IRC section 168 as of the specified date of January 1, 2025, with modifications, and specifically does not conform to the special allowance rules for bonus depreciation. As a result, California does not conform to the changes made by this provision.

Under the CTL, California does not conform to federal MACRS depreciation. Instead, the CTL is generally in substantial conformity to the pre-1981 federal asset depreciation range (ADR) rules, which generally allow property to be depreciated based on its useful life. The CTL does not conform to this provision.

Additionally, under the PITL and the CTL, California does not conform to the federal election to deduct the cost of any qualifying film and television production in the year the expenditure is incurred in lieu of capitalizing the cost and recovering it through depreciation allowances. Instead, under both the PITL and the CTL, California generally conforms to the federal income-forecast method to determine the depreciation recovery periods of property such as films, videotapes, television, book rights, patents, master sound recordings, video games, and like items. As a result, California does not conform to the changes made by this provision.

The provision would exclude from gross income 25 percent of the interest received by a qualified lender on any qualified real estate loan.

The provision defines “qualified lender” as (1) any bank or savings association with deposits insured under the Federal Deposit Insurance Act; (2) any State or federally regulated insurance company; (3) any entity wholly owned, directly or indirectly, by a company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 ; (4) any entity wholly owned, directly or indirectly, by a company that is considered an insurance holding company under the laws of any State; and (5) with respect to interest received on a qualified real estate loan secured by real property substantially used for the production of agricultural products, any federally chartered instrumentality of the United States established under section 8.1(a) of the Farm Credit Act of 1971.

For entities under (3) and (4), above, the entity must be organized, incorporated, or established under the laws of the United States or any State and its principal place of business is in the United States or any territory of the United States.

The provision defines “qualified real estate loan” as any loan secured by rural or agricultural real estate or a leasehold mortgage on rural or agricultural real estate that is made to a person other than a specified foreign entity after July 4, 2025. For refinancings, a loan would not be treated as made after July 4, 2025, if the proceeds of the loan are used to refinance a loan that was made on or before July 4, 2025.

The provision defines “rural or agricultural real estate” as any real property which is substantially used for the production of one or more agricultural products, any real property which is substantially used in the trade or business of fishing or seafood processing, and any aquaculture facility. Aquaculture facility is defined as any land, structure or other appurtenance used for aquaculture, and includes any hatchery, rearing pond, raceway, pen, or incubator. Rural or agricultural real estate does not include any property not located in a State or a possession of the United States.

The provision provides a coordination rule with IRC section 265, which provides requirements for expenses and interest related to tax exempt income and generally disallows a deduction for interest on indebtedness that is excluded from tax. Under this rule, 25 percent of the interest on indebtedness of a qualified real estate loan would not be deductible and the basis would be reduced by 25 percent.

Under the CLT, California does not conform to IRC 139L, relating to interest on loans secured by rural or agricultural real property. Additionally, California does not conform to IRC section 265, regarding expenses and interest relating to tax-exempt income, but instead has stand-alone language that disallows certain deductions related to income not included in the measure of tax.

As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

Under prior federal law, a $200 transfer tax applied to all firearms transferred except for any weapon classified under IRC section 5845(e) which was subject to a transfer tax of $5. The provision continues to apply a $200 transfer tax for machineguns and destructive devices, and reduces the tax to $0 for any other firearm transferred. Additionally, under prior federal law, a $200 tax applied to the making of a firearm, for each firearm made. This provision reduces the tax for making a firearm to $0 for any firearm that is not a machinegun or destructive device.

Existing law imposes a tax of 11 percent on the sale of firearms by manufacturers, producers, and importers, but provides an exemption from that tax for firearms subject to the transfer tax described above. The provision would allow the exemption for firearms that are subject to the $0 transfer tax by deeming those firearms as transfer tax paid.

The provision continues to apply a $200 transfer tax for machineguns and destructive devices and reduces the tax to $0 for any other firearm transferred.

This provision reduces the tax for making a firearm to $0 for any firearm that is not a machinegun or destructive device.

The provision would allow the exemption for firearms that are subject to the $0 transfer tax by deeming those firearms as transfer tax paid.

California does not conform to the federal making and transfer tax of firearms.

This provision adds a new section that redesignates current IRC section 1062 as IRC section 1063. This provision would allow, in the case of gain from the sale or exchange of qualified farmland property to a qualified farmer, at the election of the taxpayer, the portion of the net income tax of such taxpayer for the taxable year of the sale or exchange which is equal to the applicable net tax liability to be paid in 4 equal installments over four years.

An election to pay tax in installments must be made by the due date for the return of tax for the taxable year in which the gain from the sale or exchange of qualified farmland property to a qualified farmer occurs, without regard to extensions. The first installment would be required to be paid on the due date for the return of tax for the taxable year in which the gain occurs and each succeeding installment would be required to be paid on the due date of the return for the taxable year following the year that the preceding installment was made.

In the case of a sale or exchange by a partnership or S corporation, the election is made at the partner or shareholder level. The Secretary could prescribe regulations for purposes of the election.

If the taxpayer fails to timely pay any installment, the unpaid portion of any remaining installments becomes due on the date of the failure. If the taxpayer dies, then the unpaid portion of any remaining installments becomes due on the date of the return for the taxable year in which the taxpayer dies.

For a C corporation, trust, or estate, if there is a liquidation or sale of substantially all the assets of the taxpayer, a cessation of business by the taxpayer (in the case of a C corporation), or any similar circumstance, then the unpaid portion of all remaining installments is due on the date of such event (or the day before the petition is filed in a Title 11 or similar case). However, this would not apply if the sale of substantially all the assets of a taxpayer is to a buyer who enters into an agreement with the Secretary making the buyer liable for the remaining installments due in the same manner as if the buyer were the taxpayer.

This provision would also require the proration of installments if a deficiency is assessed with respect to the tax liability from the gain. The prorated portion of the installment that is not currently due would be due at the same time as such installment and the prorated portion of an installment that was already due would be paid upon notice and demand. However, the installments would not be prorated if the deficiency was due to negligence, intentional disregard, or fraud.

The provision defines “qualified farmland property” as real property located in the United States that has been used by the taxpayer as a farm for farming purposes or leased by the taxpayer to a qualified farmer for farming purposes, during substantially all of the 10-year period ending on the date of the qualified sale or exchange, and which is subject to a covenant or other legally enforceable restriction which prohibits the use of such property other than as a farm for farming purposes for any period before the date that is 10 years after the date of the sale or exchange. Property that is used or leased by a partnership or S corporation would be treated as used or leased by each person who holds a direct or indirect interest in the partnership or S corporation.

The provision defines “qualified farmer” as any individual who is actively engaged in farming within the meaning of subsections (b) and (c) of section 1001 of the Food Security Act of 1986.

The terms farm and farming purposes have the same meanings as defined under IRC 2032A(e).

California conforms by reference to Subchapter O of Chapter 1 of Subtitle A of the IRC, relating to gain or loss on disposition of property, as of the specified date of January 1, 2025, in RTC section 18031. As a result, California would not conform to these provisions.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

The Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) of 2020 (part of the Consolidated Appropriations Act, 2021 (CAA, 2021), Public Law (P.L.) 116-260), provides special rules for individuals who had qualified disaster-related personal casualty losses in a Presidentially declared disaster area, that was declared a major disaster on or after January 1, 2020 and on or before February 25, 2021. The relief applied to disasters with an incident period beginning on or after December 28, 2019, and on or before December 27, 2020.

The Federal Disaster Tax Relief Act (FDTRA) of 2023 (P.L. 118-148) extended the disaster relief treatment for personal casualty losses provided under the TCDTRA to include Presidentially declared disasters that are declared a major disaster on or before February 10, 2025, with an incident period beginning on or after December 28, 2019, and on or before December 12, 2024.

The One Big Beautiful Bill Act (OBBBA) of 2025 extends the disaster relief treatment for personal casualty losses provided under the TCDTRA to September 2, 2025. The relief applies to disasters with an incident period beginning on or after December 28, 2019, and on or before July 4, 2025.

Under the PITL, California generally conforms to IRC section 165 as of the specified date of January 1, 2025, and specifically does not conform to the special rules for individuals who had qualified disaster-related personal casualty losses arising in a qualified disaster area, as provided in the TCDTRA of 2020. As a result, California law does not conform to the changes of this provision extending the special rules for qualified disaster-related personal casualty losses arising in a qualified disaster area.

This provision would increase the percentage of a real estate investment trust’s (REIT) total assets that may be represented by securities of one or more taxable REIT subsidiaries from 20 percent to 25 percent.

California generally conforms to federal REIT rules as of the specified date of January 1, 2025, with modifications. However, California law provides that a corporation, trust, or association that is a REIT for any taxable year for federal purposes is automatically a REIT for California purposes for the same taxable year. Conversely, a corporation, trust, or association that is a not a REIT for any taxable year for federal purposes is automatically not a REIT for California purposes for the same taxable year.

Although California does not conform to the change made by this act, under California law, for any taxable year that a trust qualifies for REIT status for federal purposes is determinative for California purposes. Thus, any trust that qualifies as a REIT for federal purposes will automatically qualify as a REIT for California purposes.

The provision changes the sunset date of the previously-owned clean vehicle credit from vehicles acquired after December 31, 2032, to vehicles acquired after September 30, 2025.

California does not conform to the credit for previously-owned clean vehicles. As a result, California does not conform to the changes made by this provision.

The provision changes the sunset date of the clean vehicle credit from vehicles placed in service after December 31, 2032, to vehicles acquired after September 30, 2025.

California does not conform to the clean vehicle credit. As a result, California does not conform to the changes made by this provision.

The provision changes the sunset date of the qualified commercial clean vehicle credit from vehicles acquired after December 31, 2032, to vehicles acquired after September 30, 2025.

California does not conform to the commercial clean vehicles credit. As a result, California does not conform to the changes made by this provision.

The provision changes the sunset date of the qualified alternative fuel vehicle refueling property credit from property placed in service after December 31, 2032, to property placed in service after June 30, 2026.

California does not conform to the alternative fuel vehicle refueling property credit. As a result, California does not conform to the changes made by this provision.

The provision changes the sunset date of the energy efficient home improvement credit from property placed in service after December 31, 2032, to property placed in service after December 31, 2025.

California does not conform to the energy efficient home improvement credit. As a result, California does not conform to the changes made by this provision.

The provision changes the sunset date of the residential clean energy credit from property placed in service after December 31, 2034, to any expenditures made after December 31, 2025.

California does not conform to the residential clean energy credit. As a result, California does not conform to the changes made by this provision.

The provision sunsets the energy efficient commercial buildings deduction for construction that begins after June 30, 2026.

California does not conform to the federal deduction for energy efficient commercial buildings as of the specified date of January 1, 2025. As a result, California does not conform to the changes made by this provision.

The provision changes the sunset date of the new energy efficient home credit from qualified new energy efficient homes acquired after December 31, 2032, to qualified new energy efficient homes acquired after June 30, 2026.

California does not conform to the new energy efficient home credit. As a result, California does not conform to the changes made by this provision.

The provision removes equipment which uses solar or wind energy to generate electricity as property eligible for the five-year recovery period under the accelerated cost recovery system.

The PITL, generally conforms to the Modified Accelerated Recovery System (MACRS) in IRC section 168 as of the specified date of January 1, 2025, with modifications. As a result, California does not conform to the changes made by this provision.

Under the CTL, California does not conform to federal MACRS depreciation. Instead, the CTL is generally in substantial conformity to the pre-1981 federal asset depreciation range (ADR) rules, which generally allows property to be depreciated based on its useful life. As a result, California does not conform to the changes made by this provision.

The provision modifies the eligibility of taxpayers who can claim the zero-emission nuclear power production credit to exclude specified foreign entities for taxable years beginning after July 4, 2025. Additionally, foreign-influenced entities are ineligible for the tax credit for taxable years beginning on or after July 4, 2027.

California does not conform to the zero-emission nuclear power production credit. As a result, California does not conform to the changes made by this provision.

IRC section 45V allows the clean hydrogen credit for qualified clean hydrogen produced at a qualified clean hydrogen production facility during the 10-year period beginning on the date the facility is originally placed in service.

The provision modifies the definition of “qualified clean hydrogen production facility” to mean a facility where the construction begins before January 1, 2028.

California does not conform to the clean hydrogen production credit. As a result, California does not conform to the changes made by this provision.

IRC section 45

This provision expands the 10 percent increase in the renewable electricity production credit to advanced nuclear facilities located in a metropolitan statistical area which has (or, at any time during the period beginning after December 31, 2009, had) 0.17 percent or greater direct employment related to the advancement of nuclear power.

IRC section 45Y

The provision terminates the clean electricity production credit for qualified wind and solar facilities placed in service after December 31, 2027. Additionally, a qualified facility that begins construction after December 31, 2025, that receives material assistance from prohibited foreign entities is ineligible for the tax credit. No credit is allowed to a specified foreign entity or foreign-influenced entity. The provision also prohibits the clean electricity production credit for the production of electricity with respect to qualified solar water heating property or qualified small wind energy property, as defined in IRC section 25D(d)(1) and (4), respectively, that are leased to a third party during the taxable year. The provision modifies the credit phase out.

IRC section 6418

A taxpayer is prohibited from transferring eligible energy credits as a payment against income tax to a specified foreign entity as defined.

IRC section 6501

The provision extends the statute of limitations to assess a deficiency for an underpayment of tax as a result of an error in the determination of whether a taxpayer received “material assistance from a prohibited foreign entity,” to 6 years after the return for that year was filed.

IRC section 6662

The provision modifies the definition of what is a substantial understatement for the accuracy-related penalty from 10 percent of the tax required on the return to 1 percent when the understatement is based on the disallowance of the following applicable energy credits: advanced manufacturing production credit, clean electricity production credit, and clean electricity investment credit.

IRC section 6695B

This provision adds section 6695B, which imposes a new penalty for providing an inaccurate or false certification with respect to a manufactured product, eligible component, or constituent element, material, or subcomponent of an eligible component related to the construction of a qualified facility or energy storage technology that results in the disallowance of the advanced manufacturing production credit, clean electricity production credit, or clean electricity investment credit that exceeds the lesser of 5 percent of the tax required to be reported on the return or $100,000.

IRC section 7701

This provision adds definitions of the terms “prohibited foreign entities” as a “foreign-influenced entity,” or a “specified foreign entity,” which includes a “foreign-controlled entity” and material assistance from a prohibited foreign entity.

IRC section 45

California does not conform to IRC section 45 and does not conform to the changes made by OBBBA to IRC section 45.

IRC section 45Y

California does not conform to the clean electricity production credit. As a result, California does not conform to the changes made to the credit by this provision.

IRC section 6418

California generally does not conform to IRC section 6418, but does conform to IRC section 6418’s treatment of partnerships and S corporations. California excludes from gross income payments made pursuant to IRC 6417 and 6418 under California standalone provisions. California does not conform to the changes made to IRC 6418, by this provision.

IRC section 6501

California does not conform to IRC section 6501 and does not conform to the changes made to that section by this provision.

IRC section 6662

Under the Administration of Franchise and Income Tax Law, California has modified conformity to IRC 6662, as it existed as of the specified date of January 1, 2025. California does not conform to the changes related to the accuracy-related penalty, made by this provision.

IRC section 6695B

California does not conform to IRC section 6695B, added by this provision.

IRC section 7701

California does not conform to the IRC section 7701(a)(51) or (52), added by this provision.

• Qualified Fuel Cell
• Solar Energy to generate electricity to heat or cool a structure, or to produce solar process heat, except for purposes of heating a swimming pool
• Equipment used to produce, distribute, or use energy derived from a geothermal deposit used to generate power up to the electrical transmission stage
• Fiber-Optic Solar
• Qualified Small Wind Energy
• Waste Energy Recovery
• Energy storage technology
• Qualified biogas property
• Microgrid controllers
• Combined Heat and Power System
• Equipment that uses ground or ground water as a thermal energy source

The provision provides a 30 percent clean electricity investment credit for qualified fuel cell property that is not subject to the greenhouse gas emission rate and a credit recapture.

IRC 48E

The provision terminates the clean electricity investment credit for qualified wind and solar facilities placed in service after December 31, 2027. This provision disallows the clean electricity investment credit for facilities or energy storage technology the construction, reconstruction, or erection of which begins after December 31, 2025, that receives material assistance from prohibited foreign entities. The credit is also disallowed for a specified foreign entity or foreign-influenced entity.

The provision also prohibits the clean electricity investment credit for the investment with respect to qualified solar water heating property or qualified small wind energy property, as defined in IRC section 25D(d)(1) and (4), respectively, that are leased to a third party during the taxable year.

This provision modifies the domestic content bonus credit amount for the clean electricity investment credit for qualified wind and solar facilities.

IRC 50

This provision enacts a recapture provision for the clean electricity investment credit related to payments from prohibited foreign entities.

California does not conform to the clean electricity investment credit under IRC section 48, section 48E, or section 50. As a result, California does not conform to the changes made by this provision.

The provision modifies the sale of integrated components requirement under the advanced manufacturing production credit. To be considered an eligible component, the secondary component must be produced in the same facility as the primary component and sold to an unrelated person during the taxable year. The provision also requires that at least 65 percent of the total direct material costs paid or incurred by the taxpayer to produce the secondary component come from the primary components that were mined, produced, or manufactured in the United States. The credit is also disallowed for a specified foreign entity or a foreign-influenced entity.

The provision adds a phase out of the advanced manufacturing production credit based on applicable critical minerals other than metallurgical coal produced after December 31, 2030. The provision terminates the advanced manufacturing credit for wind energy components produced and sold after December 31, 2027. Additionally, the provision terminates the credit for metallurgical coal produced after December 31, 2029.

The provision adds metallurgical coal to the list of applicable critical minerals. The provision also modifies the definition of battery module.

California does not conform to advanced manufacturing production credit. As a result, California does not conform to the changes made by this provision.

This provision would not increase the total amount of credits allocated under the qualifying advanced energy project program by credit amounts of revoked certifications.

California does not conform to the advanced energy project credit. As a result, California does not conform to the changes made by this provision.

Clean fuel production credit (IRC section 45Z)

The provision extends the clean fuel production credit for transportation fuel sold until December 31, 2029. The provision prohibits eligibility for the credit for specified foreign entities for taxable years beginning after July 4, 2025, and prohibits eligibility for the credit for foreign-influenced entities for taxable years beginning after July 4, 2027. The provision limits the credit to transportation fuel derived from feedstock produced or grown in the United States, Mexico, or Canada and eliminates the special credit rate for sustainable aviation fuel for fuel produced after December 31, 2025. This provision modifies emission rates, including prohibiting negative emission rates except for the emissions rate applicable to transportation fuel derived from animal manure which can be less than zero, for emission rates published for transportation fuel produced after December 31, 2025. The provision prohibits the taxpayer from claiming a double credit for fuel that is produced from a fuel for which a clean fuel production credit is allowable.

Coordination of credits (IRC section 6426)

The provision disallows the sustainable aviation fuel excise tax credit for any gallon for which the clean fuel production credit is allowable. The provision provides that the sustainable aviation fuel credit would no longer apply to any sale or use for any period after September 30, 2025. This provision retroactively applies to fuel sold before July 4, 2025, but only to the extent that credits claimed have not been paid or allowed as of July 4, 2025.

Biodiesel and renewable diesel use as fuel (IRC section 40A and IRC section 6418)

The provision increases the amount of small agri-biodiesel producer credit and allows the credit in addition to any applicable clean fuel production credit. The provision (IRC section 6418) also allows the small agri-biodiesel producer credit to be transferred to an unrelated taxpayer. The provision extends the operation of the small agri-biodiesel producer credit until any sale or use after December 31, 2026, and applies to fuel sold or used after June 30, 2025.

California does not conform to these provisions. As a result, California does not conform to the changes made by this provision. Additionally, FTB does not administer excise taxes.

The provision disallows the carbon oxide sequestration credit for a taxpayer that is a specified foreign entity and foreign-influenced entity and modifies the credit amount for specified projects.

California does not conform to the carbon oxide sequestration credit. As a result, California does not conform to the changes made by this provision.

This provision modifies the depreciation adjustment to also require taxpayers to reduce their adjusted financial statement income by any capital expenditure deductions and any allowable deductions for intangible drilling and development costs in the cases of oil and gas wells and geothermal wells used to calculate their taxable income for the year.

In addition, a taxpayer will be required to disregard, for purposes of their adjusted financial statement income, any amounts of depletion expenses taken into account when a taxpayer calculates their applicable financial statement income with respect to the intangible drilling and development costs of the property.

California law does not conform to the federal adjusted financial statement income under the PITL and CTL, as of the specified date of January 1, 2025. As a result, California does not conform to the modifications made under this provision.

This provision modifies the definition of qualifying income for publicly traded partnerships to be exempt from treatment as a corporation under the IRC. The term “qualifying income” is modified to include income and gains derived from:

• The transportation or storage of sustainable aviation fuel and liquified or compressed hydrogen,
• The generation, availability for such generation, or storage of electric power, or the capture of carbon dioxide, at a qualified facility where not less than 50 percent of the total carbon oxide production is qualified carbon oxide production without regard to any required construction date,
• The production of electricity from any advanced nuclear facility,
• The production of electricity or thermal energy exclusively from geothermal or qualified hydropower production
• The operation of energy property which includes equipment, used to produce, distribute, or use energy from a geothermal deposit, but only with respect to electricity generated by geothermal power up to the electrical transmission stage, or equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure, without regard to any required construction date.

Under the PITL, California law automatically conforms to the federal definition of “qualifying income” for determining whether a publicly traded partnerships is treated as a corporation. As a result, California conforms under the PITL to the changes made by this provision.

Under the CTL, California conforms with modifications to certain publicly traded partnerships treated as corporations as of the “specified date” of January 1, 2025. As a result, California does not conform under the CTL to the changes made by this provision.

The estimated revenue impact to conform to the above provisions would result in the following loss:

The provision would make permanent the business loss limitation, restricting a non-corporate taxpayer’s losses to $250,000 ($500,000 in the case of a joint return) beginning after taxable year December 31, 2026. Excess business losses are disallowed for the taxable year and are carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in the following taxable years. An excess business loss for the taxable year is the excess of total deductions of the taxpayer attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount.

The provision would also modify the adjustment for inflation for any taxable year beginning after December 31, 2025, and the cost-of-living adjustment to calendar year 2024.

Under the PITL and CTL, California conforms to IRC section 461 as of January 1, 2025. Under the PITL, California has modified conformity to IRC section 461(l), relating to limitation on excess business losses on noncorporate taxpayers, for taxable years beginning after December 31, 2018. For California purposes, losses are treated as an excess business loss carryover to the following taxable year as opposed to a net operating loss carryover under IRC section 172. As a result, California does not conform to the changes made by this provision.

The provision makes a technical change, replacing “Under regulations prescribed by the Secretary” with “Except as provided” as it relates to treatment of payments to partners for property or services.

California conforms to IRC section 707 with modifications. However, the changes made by this provision do not impact California’s conformity under the RTC.

This provision extends the $1,000,000 deduction limitation for compensation paid to a “specified covered employee,” of a controlled group that includes a publicly held corporation. A controlled group is defined as a group treated as a single employer under a controlled group of corporations (IRC section 414(b)), partnerships and proprietorships (IRC section 414(c)), an affiliated service group (IRC section 414(m)), or under the Secretary of the Treasury regulations (IRC section 414(o)). A “specified covered employee” is defined as any of the following:

• A principal executive officer or the principal financial officer of the publicly held corporation.
• The three most highly compensated officers of the publicly held corporation for the taxable year (other than the principal executive officer or principal financial officer) who are required to be reported under the Securities Exchange Act of 1934.
• A former employee of the publicly held corporation described above in any preceding taxable year beginning after December 31,2016.
• The five highest compensated employees of all members of the controlled group other than the individuals described above.

In determining the amount members of a controlled group are limited from deducting all compensation paid to a specified covered employee by a member of the controlled group would be aggregated. Amounts in excess of $1,000,000 would be proportioned to each controlled group member based on the portion of compensation paid by that member.

California conforms, with modifications, to the federal treatment of certain excessive employee remuneration under IRC section 162 as of the specified date of January 1, 2025. Additionally, under the PITL, California does not conform to the limitation on excessive employee remuneration to the five highest compensated employees. As a result, California does not conform to the changes made under this provision to extend the $1,000,000 deduction limitation to the controlled group.

The estimated revenue impact to conform to the above provisions would result in the following gain:

The section imposes a new tax on remittance transfers (cash, money orders, cashier’s checks, or other similar physical instruments) made to a person located in a foreign country. The amount of the tax would be equal to 1 percent of the amount of the transfer and would be imposed on the sender of the transfer.

The tax is not imposed on transfers made by a debit or credit card which is issued in the United States, or from funds withdrawn from a financial institution.

FTB does not administer the remittance transfer excise tax.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136) created a refundable payroll tax credit known as the Employee Retention Tax Credit (ERTC) that was applied against applicable employment taxes. ERTC provided COVID-19 relief to employers whose operations were impacted by the shutdown.

This provision provides that any COVID-ERTC promoter who does not comply with the due diligence requirements (with respect to determining eligibility for the ERTC would be required to pay a penalty of $1,000 for each instance of noncompliance. The $1,000 penalty would be treated as a penalty imposed by the Secretary in the same manner taxes are assessed.

A “COVID-ERTC promoter” is defined as, any person who provides aid, assistance, or advice with respect to any COVID–ERTC document if, the person charges a fee based on the credit amount or refund and 20 percent or more of the person’s gross receipts are from ERTC-related services, or 50 percent or more of the person’s gross receipts are from ERTC-related services, or 20 percent or more of the person’s gross receipts are from ERTC-related services and the person’s gross receipts exceed $500,000.

A “COVID-ERTC promoter” does not include a certified professional employer organization.

A “COVID-ERTC Document” is defined as any return, affidavit, claim or other document related to eligibility for, or the calculation or determination of any amount directly related to any such credit or advance payment.

The provision specifies that no credit will be allowed and no refund is to be made after July 4, 2025, unless that claim for a credit or refund was filed by the taxpayer prior to January 31, 2024. Additionally, the statute of limitations on the assessment of amounts related to the ERTC would be extended to six years from the date the credit or claim for refund is made and this extension would also apply an assessment related to the wage deduction used to calculate the credit.

The provision expands the penalty for erroneous claim for refund or credit to also apply to excessive claims for refund or credit of employment tax.

The Secretary is required to issue regulations or other guidance that may be needed or appropriate to carry out the purpose of this provision.

The FTB does not administer employment taxes and the changes made by this provision do not impact the department. Employment taxes are administered by the Employment Development Department.

This provision requires a taxpayer to include on the tax return their social security number, and the social security number and name of the individual whose qualified tuition and related expense is associated with claiming the American Opportunity or Lifetime Learning Credits.

The provision defines a “social security number” to have the same meaning as used under the child tax credit (IRC section 24(h)(7)) which is a social security number issued to an individual by the Social Security Administration, but only if the social security number is issued to a citizen of the United States before the date of the return.

The provision would modify the application of math error authority applicable to the higher education tuition credits to apply to an omission of a “social security number or employer identification number” on the return instead of a “TIN”.

California does not conform to the American Opportunity and Lifetime Leaning Credits. As a result, California does not conform to the changes made by this provision.

This provision appropriates $15 million dollars for the fiscal year ending on September 30, 2026, for necessary expenses of the Department of the Treasury to provide a report to Congress within ninety days of the passing of the Act, on the following:

• The cost of improving and creating public/private partnerships to provide free tax filing for up to 70 percent of taxpayers, and the cost to replace any direct e-file programs currently provided by the Internal Revenue Service (IRS).
• Opinions and preferences of the taxpayers of a taxpayer funded government-run service or a free service provided by private sector.
• An evaluation of the feasibility of a new approach, to make consistent and simple options across all providers, that would address the needs of all taxpayers.
• The cost of developing, running and administering a free direct e-file tax return system for various options of coverage to taxpayers based on their adjusted gross income and return complexity.

CalFile is the state’s free, online program for taxpayers to complete and e-file their personal income tax returns directly with California. In 2024, the IRS rolled out Direct File, which allowed taxpayers to file their 2023 federal tax return online, for free, and directly with the IRS. California partnered with the IRS during the pilot year, which allowed the Direct File tool to refer California taxpayers to the state’s stand-alone electronic tax return filing system, CalFile, to file their California tax return. The appropriations provided under this provision do not impact California’s CalFile program.

The provision adds and limits a lawfully present individual’s eligibility for the premium tax credit to an “eligible alien.” “Eligible alien” means a lawfully present individual who is an alien who has been granted the status of Cuban and Haitian entrant; or an individual who is lawfully residing in the United States in accordance with the Compacts of Free Association between the United States and Micronesia, the Marshall Islands, and Palau.

The provision provides conforming amendments relating to information verification, requiring the Secretary to establish a program for verifying whether an individual is an eligible alien. The provision provides conforming amendments relating to advance determinations prohibiting the premium tax credit to aliens that are not eligible aliens.

California does not conform to IRC section 36B, relating to refundable credits for qualified health plan under the Affordable Care Act, nor to Subtitle K, Group Health Plan Requirements, of the IRC.

California has a standalone program providing a California Premium Assistance Subsidy (PAS) to applicable return filers that use the IRC section 36B eligibility requirements, with modifications. California PAS provides financial assistance to pay the premiums for a qualified health plan through the California health insurance marketplace, which are reconciled through the California Personal Income Tax Return, if required. For California purposes, eligibility for premium assistance subsidy is dependent on the Program Design adopted each year by Covered California that references IRC section 36B.