On October 1, 2025, the California Governor signed SB 711, which, for the first time in a decade, updates California's conformity to the Internal Revenue Code (IRC) for both corporate and individual income tax purposes. Generally, California selectively incorporates specific provisions of the IRC as of January 1, 2015. SB 711, effective immediately, updates California's specified IRC conformity date to January 1, 2025. While California now conforms to many of the federal tax changes enacted since January 1, 2015,¹ the state continues to decouple from several changes enacted by the federal Tax Cuts and Jobs Act (TCJA). California also does not conform to the changes made by the "One Big Beautiful Bill Act" (P.L. 119-21, OBBBA), as it was enacted on July 4, 2025.

Conformity to select IRC provisions

Federal changes California conforms to include, but are not limited to, the following:

• Election of the alternative simplified credit (ASC) method for calculating the research credit, but with reduced credit percentages as follows:
• 3% (from 14% under IRC Section 41(c)(4)(A)) of qualified research expenses (QREs) that exceed 50% of average QREs for the prior three years
• 1.3% (from 6% under IRC Section 41(c)(4)(B)(ii)) if the taxpayer has no QREs in any of the previous three years
• Limitation of IRC Section 1031 like-kind exchanges to real property only, which eliminates deferral for exchanges of certain non-real property
• Treatment of loan expenses under additional Paycheck Protection Program
• Treatment of certain related party amounts paid or accrued in hybrid transactions or with hybrid entities under IRC Section 267A
• Deductions for IRA contributions for individuals age 70½ and older, as well as increased deductible catch-up contribution amounts and SIMPLE contribution amounts enacted under the SECURE Act and SECURE 2.0 Act
• Treatment of alimony
• Limitation on gain exclusion for the sale of stock to employee stock ownership plans under which IRC Section 1042(h) applies to the sale of stock in an S corporation for tax years beginning on or after January 1, 2028

Before approving SB 711, the Assembly removed provisions that would have decoupled from the low-income housing tax credit minimum credit rate provision under IRC Section 42(b)(3). Thus, California will continue to conform to this provision.

Decoupling/non-conformity to select IRC provisions

Federal changes California continues to decouple from under prior conformity legislation and federal changes California specifically decouples from under SB 711 include, but are not limited to, the following:

• Business interest expense limitation under IRC Section 163(j)
• Changes to the corporate alternative minimum tax under IRC Section 56A, enacted as part of the Inflation Reduction Act, and instead applying IRC Section 56A as it read on January 1, 2015, unless otherwise provided
• Qualified business income deduction under IRC Section 199A
• TCJA changes relating to amortization of research and experimental expenditures under IRC Section 174 (for corporate income tax purposes)
• IRC Section 174 relating to amortization of research and experimental expenditures, instead following this provision as it read on January 1, 2015 (for personal income tax purposes)
• Credit for increasing research activities under IRC Section 280C(c)
• Federal limit on miscellaneous itemized deductions under IRC Section 67
• $750,000 cap on mortgage interest expenses
• Changes to net operating loss provisions under IRC Section 172
• TCJA changes to IRC Section 367(a) related to the repeal of the active-trade-or-business exception for transfers of certain property to foreign corporations
• Carryforward of disallowed business interest under IRC Section 381(c)(20)
• Carryforward of disallowed interest under IRC Section 382(d)(3)
• Amendments to IRC Section 382(k)(1) related to loss corporations
• Special rule for real estate investment trusts under IRC Section 312(k)(3)(B)(ii) on amounts deductible under IRC Section 179D
• TCJA changes to the rehabilitation credit under IRC Section 47(c)(2)(B)(iv) related to certified historic structure
• Exclusion from gross income of certain coal power grants to non-corporate taxpayers
• Federal casualty loss and disaster losses
• Limitation of the deduction for state and local taxes for tax years 2018 to 2025
• Changes to federal provisions under IRC Section 1061 regarding the recharacterization of certain partnership gains from an investment partnership
• Amendments to IRC Section 460(c)(6)(B)(ii) regarding special rules for federal long-term contracts
• IRC Section 481(d) related to adjustment attributions to conversions from an S corporation to a C corporation

In addition, California still does not conform to health savings account treatment, modified accelerated cost recovery (MACRs) for corporations, bonus depreciation and increased IRC Section 179 expensing, opportunity zones, global intangible low-taxed income (GILTI) or foreign-derived intangible income (FDII).

SB 711 also disallows deductions for excise tax imposed by (1) IRC Section 4501 related to the repurchase of corporate stock and (2) IRC Section 5000D related to designated drugs during noncompliance periods.

SB 711 also does not conform to renewable energy development provisions added by the Inflation Reduction Act, which California addressed separately in the recently enacted SB 302 (see Tax Alert 2025-2021).

Implications

In enacting SB 711, California has again confirmed its nonconformity to significant portions of the TCJA. Additionally, SB 711 does not conform to federal changes made by the OBBBA, which will need to be considered by the legislature in future sessions.

Even with continued nonconformity to significant federal provisions, the California legislature in its bill analysis noted that there have been "more than 1,000 substantive changes" to the IRC since the state last updated its conformity date.

The conformity changes in SB 711 will impact both business and individual taxpayers. With SB 302 being signed October 1, 2025, there is little time left to adjust estimated payments for 2025. However, California does provide penalty relief when the penalty is due to a change in law that occurred during the year at issue.