In July 2025, Congress passed, and the President signed the One Big Beautiful Bill Act (OBBBA), introducing a number of significant changes to the federal tax code. As is often the case, currently, California has chosen not to conform to a number of key provisions of the Act. State Legislation is in the works that could change that, but until that is passed, taxpayers and preparers should be aware of the following six areas where state and federal law now diverge:
- Bonus Depreciation
Under OBBBA, 100% first-year bonus depreciation has been made permanent for federal tax purposes. California, however, continues to disallow any bonus depreciation. As a result, businesses must maintain separate depreciation schedules for federal and state reporting, especially when calculating current year taxable income, and capital gain or loss upon the sale or disposition of depreciated assets.
- Research & Development (R&D) Expensing
OBBBA restores immediate expensing for R&D costs starting in 2025 and includes retroactive relief for amounts previously capitalized. While California has always allowed immediate expensing of R&D costs, it does not conform to the federal retroactive relief provisions. This inconsistency may require adjustments for prior-year capitalized amounts on state returns.
- Qualified Business Income (QBI) Deduction
OBBBA makes the federal QBI deduction permanent and implements certain modifications. California does not conform to IRC Code Section 199A and does not allow any similar deduction on state income tax returns. This results in a potentially significant variance in taxable income between federal and California filings for business owners.
- Business Interest Expense Limitation (§163(j))
Federally, the Act reinstates a more generous EBITDA-based limitation for interest deductions. California, by contrast, does not impose a similar limitation. Nevertheless, businesses must carefully track interest expense to ensure accurate reporting and consistency between federal and state returns.
- Health Savings Accounts (HSAs)
Contributions to HSAs remain deductible and earnings tax-free at the federal level. California, however, continues to disallow conformity with HSA provisions. Contributions (including employer contributions), account earnings, and distributions are all taxable and must be added back to California income.
- 529 Plan Withdrawals for K–12 Education
While 529 plans are governed by federal tax laws, individual states administer the plans, resulting in key differences between California’s plan (ScholarShare 529) and the general federal guidelines. Qualified expenses include tuition, fees, books, supplies, equipment, and room and board for higher education at accredited institutions. Previously at the federal level, qualified expenses included K-12 tuition (up to $10,000). CA did not (still does not) allow for K-12 expenses.
Beginning in 2026, OBBBA expands the definition of qualified K–12 expenses and increases the annual allowable withdrawal from 529 plans to $20,000.
Unlike many states, California does not offer a state income tax deduction for contributions to its 529 plan. While federal law allows tax-free withdrawals for K-12 tuition and rollovers to a Roth IRA, California treats the earnings portion of these withdrawals as subject to state income tax PLUS an additional 2.5% tax.
Personal Casualty Losses
The One Big Beautiful Bill Act (OBBBA) made significant changes to the federal tax treatment of personal casualty losses, particularly for those in qualified disaster areas. However, California has not conformed to all these changes, leading to differences in how taxpayers deduct casualty losses on their state and federal returns.
Here’s a breakdown of the key areas of nonconformity regarding casualty losses:
1. Deductibility for non-itemizers
- Federal (under OBBBA): Individuals who do not itemize deductions can claim personal casualty losses related to qualified disasters as an additional standard deduction.
- California: Non-itemizers cannot claim personal casualty losses, even those related to qualified disasters.
2. Threshold for casualty losses
- Federal (under OBBBA): For qualified disaster losses, the 10% Adjusted Gross Income (AGI) floor on net casualty losses is waived.
- California: The 10% AGI floor still applies to personal casualty losses, including those related to disasters.
3. Per-casualty limit
- Federal (under OBBBA): The $100 per-casualty limit for qualified disaster losses is increased to $500.
- California: The $100 per-casualty limit still applies to personal casualty losses, according to YouTube.
What this means for California taxpayers
California taxpayers affected by disasters will need to adjust their casualty loss deductions to account for these differences between federal and state law. It’s essential to carefully review the specific instructions for California casualty loss deductions on the Franchise Tax Board (FTB) website and consult with a tax professional for personalized guidance.
Conclusion
Taxpayers and practitioners must remain vigilant in identifying areas where California departs from federal law under OBBBA. Proper planning and tracking are essential to ensure compliance and avoid unintended tax consequences on state returns.