FTB vs IRS — Key Differences for California Taxpayers
California has its own tax agency — the Franchise Tax Board (FTB) — that operates independently from the IRS. California does not automatically conform to federal tax law changes. Every year, the California legislature decides which federal provisions to adopt, modify, or reject. This creates a complex dual-filing environment where your California taxable income can be significantly different from your federal taxable income.
For comprehensive California tax strategy, see KDA's Business Owners page.
Where California Does Not Conform to Federal Law
| Federal Provision | Federal Treatment | California Treatment |
|---|---|---|
| Bonus depreciation (IRC 168(k)) | 100% first-year deduction | Not allowed — use Sec. 179 only |
| QBI deduction (IRC 199A) | 20% deduction for pass-through income | Not allowed |
| Capital gains rates | 0%/15%/20% (long-term) | Ordinary income rates (up to 13.3%) |
| SALT deduction cap | $10,000 cap (TCJA extended — remains in 2026) | No cap on CA return; use PTET to bypass |
| Unreimbursed employee expenses | Not deductible (TCJA 2017) | Still deductible on CA return |
| Moving expense deduction | Not deductible (TCJA 2017) | Still deductible on CA return |
| Alimony (pre-2019 agreements) | Not deductible/taxable (TCJA) | Still deductible/taxable on CA return |
| HSA contributions | Deductible | Not deductible on CA return |
| 529 plan contributions | No federal deduction | No CA deduction either |
California Franchise Tax & LLC Fees
Every LLC, corporation, and S Corp doing business in California pays a minimum $800 annual franchise tax to the FTB. This is due even if the business has no income. LLCs with gross receipts over $250,000 also pay a gross receipts fee: $900 (over $250K), $2,500 (over $500K), $6,000 (over $1M), or $11,790 (over $5M).
The $800 franchise tax is deductible as a business expense on both federal and California returns. The gross receipts fee is also deductible.
California SDI for Self-Employed
California's State Disability Insurance (SDI) program is mandatory for employees, with the employer withholding 1.1% of wages in 2026 (no wage base cap). Self-employed individuals can voluntarily elect SDI coverage, which provides disability and paid family leave benefits. The SDI contribution for self-employed is 1.1% of net earnings.
California Residency & Source Income Rules
California taxes its residents on worldwide income — all income from all sources, regardless of where earned. California also taxes non-residents on income sourced to California (income earned from California business activities, California real estate, and California employment). The FTB aggressively pursues former California residents who claim to have moved but maintain significant California connections.
The FTB's "safe harbor" for part-year residents requires that you spend fewer than 546 days in California over any consecutive 24-month period to be treated as a non-resident. Simply registering a vehicle in another state or getting a new driver's license is not sufficient — the FTB looks at where you actually live, work, and maintain your closest connections.
Need Help Implementing This?
KDA's licensed CPAs and Enrolled Agents work with California business owners every day. Book a free consultation to see exactly how this applies to your situation.
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