California Conformity to Federal Law
California generally conforms to the Internal Revenue Code as of a specific date — California's "conformity date." California does not automatically adopt federal law changes; the California legislature must affirmatively conform to each federal change. This means there is often a lag between federal law changes and California conformity, and some federal provisions are never adopted by California at all.
Key Differences for 2026
| Item | Federal | California |
|---|---|---|
| Bonus depreciation | 100% (OBBBA, permanent) | Not allowed; use MACRS |
| No Tax on Tips | Above-the-line deduction (OBBBA, 2025-2028) | Not conformed; tips taxable |
| No Tax on Overtime | Above-the-line deduction (OBBBA, 2025-2028) | Not conformed; overtime taxable |
| QBI deduction (Sec 199A) | 20% deduction (OBBBA, permanent) | Not allowed |
| Standard deduction | $15,000 single / $30,000 MFJ (2025) | $5,540 single / $11,080 MFJ (2025) |
| SALT deduction | $40,000 cap (OBBBA, 2025-2029) | No cap on California return |
| Section 179 expensing | $1,160,000 (2023) | $25,000 |
| Capital gains rates | 0%, 15%, 20% | Ordinary income rates (up to 13.3%) |
Depreciation Differences
The depreciation differences between federal and California are among the most significant for business owners. Federal law allows 100% bonus depreciation for qualified property placed in service after January 19, 2025 (OBBBA). California does not conform — California requires MACRS depreciation over the asset's recovery period. For a California business that purchases $500,000 of equipment, the federal deduction is $500,000 in year one; the California deduction is approximately $100,000 (5-year MACRS). This creates a $400,000 difference in taxable income between the federal and California returns.
Deduction Differences
California does not allow the federal QBI deduction (Section 199A) — a 20% deduction on qualified business income that can save federal taxpayers $10,000–$50,000 or more annually. California also does not conform to the OBBBA's No Tax on Tips and No Tax on Overtime provisions. California's standard deduction is significantly lower than the federal standard deduction, meaning more California taxpayers benefit from itemizing. California does allow the mortgage interest deduction and charitable contribution deduction, generally following federal rules.
Credit Differences
California offers several credits not available federally (CalEITC, Young Child Tax Credit, Renter's Credit) and does not allow some federal credits on the California return. The Child Tax Credit is different in California — California has its own Young Child Tax Credit for children under 6, but it is less generous than the federal Child Tax Credit for older children. California does not have an equivalent to the federal Earned Income Tax Credit for higher-income earners — California's CalEITC has lower income thresholds.
Planning for Conformity Differences
KDA's approach to California conformity differences: (1) Calculate depreciation separately for federal and California — never use the same depreciation schedule for both. (2) Track the California basis of assets separately from federal basis. (3) Do not claim the QBI deduction on the California return. (4) Do not claim the No Tax on Tips or No Tax on Overtime deduction on the California return. (5) Recalculate the California standard deduction vs. itemized deduction comparison separately from federal — the lower California standard deduction means itemizing is more beneficial for California purposes.
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