California Does Not Conform to OBBBA: Why 2025 Federal Tax Changes Require Separate State Adjustments

By Gloria Liu, CPA | YCL Tax, Accounting & Advisory

One-Sentence Takeaway

If you are a California resident, operate a business in California, or receive a K-1 containing federal tax-benefit items, do not copy the federal result directly onto the California return. OBBBA was enacted on July 4, 2025, but the California FTB states that California generally does not conform; beginning with the 2025 tax year, individuals and businesses should maintain a federal-to-California adjustment schedule and report each difference on Schedule CA or the applicable business return.

News Background

Federal and California tax law do not update in lockstep. California generally starts with the Internal Revenue Code as of a fixed conformity date and then selectively adopts or modifies federal changes. The FTB’s 2025 Schedule CA (540) instructions generally reference the IRC as of January 1, 2025 and expressly state that California does not generally conform to OBBBA, signed on July 4, 2025. Individuals use Schedule CA to bridge federal and California amounts, while entities address the differences on Forms 100, 100S, 565, or 568.

Federal vs. California Comparison

SALT itemized deduction: The 2025 federal cap increased to $40,000 ($20,000 for married filing separately), subject to an income-based limitation. California does not adopt that federal cap, and California income tax itself is not deductible on the California return, so Schedule CA must be computed separately.

Section 529 plans: OBBBA expanded certain federal qualified education expenses, including specified K–12 and credentialing costs. California did not automatically adopt the expansion, so a federally tax-free distribution may require separate California analysis.

QSBS: Federal law expanded the Section 1202 qualified small business stock exclusion. California generally does not allow the federal Section 1202 exclusion, making a two-system tax projection important before a sale.

Research expenditures: Federal law restored faster deductions for qualifying domestic research costs. California business-return instructions expressly state that California does not conform to the OBBBA amendments to Section 174, so capitalization and amortization may continue for California purposes.

Bonus depreciation and QBI: California already does not conform to federal Section 168(k) bonus depreciation and does not allow the Section 199A QBI deduction. A federal extension or expansion under OBBBA does not automatically change the California result.

Disaster losses and other individual items: FTB directs taxpayers to review the specific Schedule CA instructions for OBBBA-related differences rather than infer California treatment from the federal return.

Are You Affected? Self-Check

You were a full-year or part-year California resident in 2025, or earned California-source income.

Your C corporation, S corporation, partnership, or LLC claimed federal research deductions, bonus depreciation, or a PTE tax deduction.

Your K-1 contains separate federal and California amounts, or the entity maintains only one depreciation, research, or basis schedule.

You plan to sell stock that may qualify for the federal QSBS exclusion or use 529 funds for a newly eligible federal expense.

You expect California estimated tax to fall simply because federal taxable income decreased.

Simplified Example

Assume a California-filing S corporation incurs $100,000 of qualifying domestic research expenditures in 2025. For illustration, assume the full amount is deductible federally. Because California does not conform to the OBBBA Section 174 change, it continues to apply capitalization and amortization rules. If only about $10,000 is deductible for California in the first year, the corporation may need an approximately $90,000 California add-back and a separate California amortization schedule for future years. The difference can flow through to shareholder K-1s, basis, estimated taxes, and later returns. This example is simplified; actual treatment depends on research location, entity type, tax year, and current FTB guidance.

Action Steps and Timeline

Now: Identify every OBBBA-related item on the 2025 federal return instead of relying only on federal AGI or taxable income.

Before filing: Prepare a federal-to-California bridge for depreciation, research, K-1, QSBS, 529, and itemized-deduction items, then tie each difference to Schedule CA or the applicable business-return line.

During estimated-tax planning: Recalculate California taxable income separately so expanded federal deductions do not create an understated California payment.

After filing: Preserve California-specific basis, depreciation, and Section 174 amortization schedules for later years, asset sales, and potential FTB inquiries.

Monitor developments: California may selectively adopt federal provisions through later legislation, so use the latest FTB forms and guidance for the filing year.

How YCL Can Help

Review federal and California returns and build a line-by-line conformity schedule.

Prepare state adjustments on Schedule CA and Forms 100, 100S, 565, 568, and K-1s.

Maintain separate federal and California depreciation, research-amortization, and basis workpapers.

Model federal and California outcomes for QSBS, 529, SALT, and PTE elective tax items.

Reassess California-source income, estimated taxes, and cash flow for multistate individuals and businesses.

Frequently Asked Questions

Q: If my tax software calculated the federal return, will California adjustments happen automatically?
A: Do not assume so. The software needs correct state inputs and supporting workpapers; depreciation, research, K-1, 529, and stock-basis items often require professional review.

Q: If I claim 100% federal bonus depreciation, can California deduct the asset immediately too?
A: Generally no. California does not conform to IRC Section 168(k), so a separate California depreciation schedule is usually required.

Q: Can I reduce California estimated tax when my federal tax goes down?
A: Not automatically. If California adds back the federal benefit, California taxable income may not decline by the same amount.

Consultation, Contact, and Disclaimer

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Disclaimer: This article provides general tax information only and does not constitute tax, legal, or investment advice for any individual or business. The example is simplified. Application depends on the taxpayer’s facts and the latest laws, forms, and guidance issued by the IRS, California FTB, and other authorities. Consult a licensed professional for advice specific to your situation.