New IRS Conformity Date Under SB 711 in California

One of the largest tax changes in years is on the horizon for the California business community and tax professionals. California's conformity date to the federal Internal Revenue Code (IRC) is now January 1, 2025, pursuant to SB 711, thereby filling a previously unclosed gap in the law that tied the state to the 2015 version of the IRC.

But on the surface, this could appear to be just another legislative update. It's actually a huge change impacting thousands of deductions, credits, reporting issues, and strategies that businesses and individuals have depended upon for almost 10 years. Get a professional (like an IRS audit attorney in San Diego) who can help during tax audits.

What is the Conformity Update?

Conformity of taxes to the federal tax laws defines the extent to which California adheres to federal tax law. As the state had been using a 2015 IRC conformity date, there were significant discrepancies between federal and California returns, which frequently caused a problem for taxpayers.

California follows the lead of the federal tax law in many respects with SB 711, which adopts numerous federal tax law changes from the last ten years, and makes some changes to reduce compliance issues and add planning concerns.

For tax professionals, the shift will mean that many of their assumptions may not hold true.

Areas where California is Catching Up

The revised conformity date also includes many federal provisions that were not previously available or applied according to California law.

Some of the areas that are likely to be impacted include:

a.     Some research and development tax incentives

b.     Changes to the tax regime for retirement benefits

c.      Different accounting strategies used by businesses.

d.     Changes in partnership and pass-through entity reporting.

e.     Policies enacted after 2015 to provide disaster relief to the Federal government.

f.       There are many administrative and technical improvements.

Some of these processes could be streamlined for businesses that have adopted a different tax treatment in California than in the federal government for years. Get an expert (similar to a criminal tax attorney in Los Angeles) for some additional help.

Where California Still Diverges from Federal Law?

Even though California has taken a giant leap towards conformity, it hasn't embraced all federal tax changes.

One of the biggest remaining differences is for federal tax cuts and jobs-related legislation (TCJA).

It is important for taxpayers to watch for:

1.     Bonus depreciation rules

2.     Some of the tax deductions for business expenses

3.     Qualified business income treatment

4.     Federal opportunity zone statutes

5.     A number of international tax measures

The following is a list of other TCJA-related benefits that California remains opposed to or has changed:

Conformity is not uniformity.

However, businesses need to be aware of the areas where federal and California tax law are fundamentally different.

Establish a legacy plan for your tax issues

The most serious risk might not be with the new rules, but with the "old" planning strategies.

California's 10-year-old conformity system has spawned accounting programs, tax forecasts, compliance protocols, and more for many businesses. The assumptions in those systems might now be outdated with respect to the prevailing law.

Potential problem areas are:

a.     Multi-year depreciation schedules

b.     Research credit calculations

c.      Entity structure planning

d.     The valuations of deferred tax assets.

e.     State forecast models

f.       The internal accounting software setups

Without checking these frameworks, there may be reporting mistakes or tax loopholes to be missed.

Tips on how to survive as a business and tax professional

Those organizations that take a proactive approach toward transition will find it easier to make the transition.

Here are some ideas to get you started:

1.    Perform a Full Tax Review. Complete Full Tax Review

Review past tax planning strategies and assess if any of the assumptions were made by pre-2025 conformity rules.

2.    Review Accounting Systems

Check software, tax preparation software, and internal procedures for conformity to the new conformity framework.

3.    Revisit Multi-Year Projections

Calculations of taxes based on previous California tax projections may need to be adjusted.

4.    Identify New Opportunities

Newly adopted Federal provisions may result in deductions, credits, or simplifications in compliance that would not have been available previously.

Contact qualified tax professionals. Seek advice from professional tax attorneys

The interplay between conformity changes in California and exceptions to remain state-specific may be complicated, especially for businesses with extensive operations or multistate activities.

SB 711 isn't just a technical tax change. California's move to bring its IRC closer to conformity with federal tax rules from 2015 to January 1, 2025, has, in essence, changed the nature of the tax burden for businesses, professionals, and individual taxpayers. Although many federal provisions are now becoming known, there remain significant differences between federal law and California law.

The best way to do it is to consider this a total tax review day. Legacy accounting frameworks need to be reviewed by businesses to reassess long-term planning strategies and to determine where and how accounting changes due to conformity may pose threats or opportunities. A decade-old assumption may be one of the costliest of all the mistakes a taxpayer could make in a post-SB 711 context.