California’s 2025 IRC conformity update: What California taxpayers need to know

California’s tax landscape is entering a new era of alignment with federal law — yet with its signature selective approach.

Overview

On Oct. 1, 2025, Governor Gavin Newsom signed Senate Bill 711, (the Legislation), which updates California’s conformity to the Internal Revenue Code (IRC) from Jan. 1, 2015, to Jan. 1, 2025, for both personal and corporate income tax provisions, effective for tax years beginning on or after Jan. 1, 2025. This long-awaited move incorporates a decade’s worth of federal changes into state law, but true to tradition, California preserves partial conformity and nonconformity in numerous areas. For California taxpayers, this means both opportunities and ongoing complexity.

Key Provisions of the Legislation

California’s new conformity date pre-dates the enactment of the One Big Beautiful Bill Act (OBBBA), which was signed on July 4. As a result, California does not automatically conform to the changes enacted by OBBBA, and the Legislation specifically continues to decouple from several changes enacted by the prior federal tax reform, the Tax Cuts and Jobs Act (TCJA). Specifically, examples of decoupling include but are not limited to, the following:  

• Corporate alternative minimum tax: The Legislation applies IRC Sec. 56A as of Jan. 1, 2015, except as specifically provided.
• Net operating loss (NOL) deductions: The Legislation decouples from the 80% federal NOL limitation found at IRC Sec. 172. That said, California has historically paused the ability to utilize NOLs for specific periods. Most recently, for taxable years 2024 through 2026, California suspended the NOL deduction for specific taxpayers.
• Business interest expense limitation: California decouples from IRC Sec. 163(j) for corporate income tax purposes. However, the Legislation, as currently enacted, imposes the TJCA version of IRC Sec. 163(j) for personal income tax purposes.   
• Research and experimental (R&E) expenses: The Legislation retains the IRC section 174 language as of Jan. 1, 2015. As such, for California purposes, both U.S. and non-U.S. R&E costs continue to be immediately deductible as California does not conform to the TCJA amendments to IRC Sec. 174 or OBBBA’s IRC Sec. 174A changes.
• Bonus depreciation: California continues to decouple from the bonus depreciation provisions at Sec. 168(k).

In addition to specific decoupling provisions detailed above, California does update its conformity relating to specific provisions including the following:

• Alternative simplified research credit: For taxable years beginning on or after Jan. 1, 2025, the Legislation adopts the federal Alternative Simplified Credit (ASC) under IRC Section 41(c)(4), with specified modifications including reduced credit percentages. However, note that the Legislation repeals the Alternative Incremental Credit (AIC) for taxable years beginning on or after Jan. 1, 2025. California guidance indicates that if a taxpayer “previously elected the AIC, to continue receiving research credit for taxable years beginning on or after Jan. 1, 2025, you must act. On your timely-filed original return for the 2025 taxable year, use FTB Form 3523 to elect either the regular incremental credit or the new ASC, or you can choose not to claim the research credit. IMPORTANT: A previous AIC election will not default to another credit.”
• Business electronic filing mandate: California now conforms to federal law that requires corporations, partnerships and exempt organizations that meet certain thresholds to file original and amended returns electronically. Note: an annual e-filing requirement waiver may be filed if a taxpayer is unable to comply with the e-filing requirements.

See: Additional guidance on these provisions in the California Tax News, December 2025.

What’s next?

California’s move to update its conformity date is a major step toward reducing compliance headaches for taxpayers. However, the above analysis just touches upon the surface of California’s complicated conformity analysis as the state’s continued imposition of selective conformity requires ongoing vigilance. Legislative “cleanup” and targeted responses to federal changes are expected in the coming year.

In the meantime, taxpayers should consult with their Baker Tilly tax advisor to understand areas of nonconformity and partial conformity as it relates to their 2025 California filings and beyond.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.