California just wrapped up its first major federal tax conformity update in a decade, but don’t expect this to be the end of the story. If anything, it’s just the opening chapter of what’s shaping up to be a multiphase process that will keep tax practitioners on their toes for years to come.
Gov. Gavin Newsom’s (D) signature brought California into alignment with more than 1,000 changes to the Internal Revenue Code that took effect before Jan. 1. It was the biggest synchronization between state and federal tax law since 2015.
But panelists at a recent Sacramento Delegation meeting hosted by the California Lawyers Association panel noted that this isn’t the final word. The legislature plans to keep pushing cleanup legislation to make life easier for both taxpayers and the Franchise Tax Board. Translation: Expect more amendments down the road.
Corrections on Horizon
Watch for targeted fixes in two main areas—personal income tax provisions and business expense deductions. As taxpayers work through the new conformity provisions in real-world scenarios, they will inevitably hit snags that need legislative attention.
The good news? The emphasis on administrative ease suggests lawmakers are willing to listen when provisions create compliance headaches.
This cleanup phase offers a real opportunity for tax professionals to weigh in—much like they did before the conformity bill was submitted. Both individual taxpayers and taxpayer groups worked directly with the legislature on the current bill, and that collaborative approach will likely continue.
Practitioners and taxpayers should monitor legislative proposals through California tax-centric groups and keep an eye out for the public written comment periods, which allow the taxpayer community at large to identify specific compliance burdens in draft legislation and propose amendments. Given the fluid nature of potential technical corrections, taxpayers may, for example, want to avoid making irreversible tax elections until technical corrections are finalized.
Complicating Federal Changes
President Donald Trump’s tax-and-spending law this year threw a wrench into the recently passed conformity bill. Because most of those changes took effect after Jan. 1, 2025, California’s conformity bill didn’t capture them. Based on the Sacramento Delegation panel discussion, three provisions could gain traction in the state legislature.
Tipped income exemption. Senate Bill 17, which would exempt tipped income from state tax, is expected to make another appearance. This provision would upend the hospitality and service industry in California. Those employers should evaluate whether tax-free tips will require compensation restructuring and budget for payroll system updates.
Overtime pay exclusion. Exempting overtime pay from taxation would affect countless California workers and require major overhauls to payroll systems and withholding calculations. Manufacturing, health-care, and retail businesses with significant overtime usage should model the potential revenue impact and implementation costs now.
Car loan interest deductibility. This one could bring back the kind of complexity we saw before the 2017 federal tax overhaul, forcing taxpayers to track and document personal vehicle interest expenses. Companies with vehicle-dependent workforces face the biggest administrative burden and should evaluate whether tax savings justify compliance costs.
For all three provisions, businesses shouldn’t wait for final legislation. Begin scenario planning now and engage with industry lobbyists early to shape implementation details such as effective dates and transition rules.
The Political Elephant
Here’s what really matters for planning purposes: Panelists at the Sacramento Delegation meeting acknowledged that politics may play a major role in determining which federal changes California adopts. With Democrats dominating state leadership and potentially wary of Trump-era tax initiatives, we are more likely to see selective conformity than wholesale adoption of federal changes.
This selective approach creates significant planning challenges. When California picks and chooses which federal provisions to adopt—as it has historically with bonus depreciation, interest limitations, and net operating loss rules—taxpayers essentially operate under two parallel tax systems. This means more complex modeling for multistate businesses and increased compliance costs.
California’s chronic budget pressures add another layer of uncertainty. Democratic leadership must balance philosophical opposition to Trump tax cuts against revenue considerations. Revenue estimates accompanying conformity bills will signal how serious the fiscal impact is and whether the legislature will support passage.
The practical result: Conformity decisions become transactional and politically dependent rather than driven by administrative convenience. This uncertainty premium means extended legislative debates, increased likelihood of retroactive changes, and difficulty planning across election cycles.
The Bottom Line
California’s approach to federal tax conformity has always been selective, and politics will continue to drive decisions. While the recent update provides some much-needed clarity on pre-2025 federal changes, new federal legislation and political dynamics guarantee that conformity will remain a moving target. Taxpayers should plan accordingly—and stay engaged in the legislative process.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Shail P. Shah is shareholder at Greenberg Traurig with focus on complex California tax planning and representation.
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