After nearly a decade of lagging behind federal tax updates, California has finally hit “refresh.” Signed into law on October 1, 2025, Senate Bill (SB) 711 delivers the most sweeping overhaul of California’s tax conformity rules since 2015.
The legislation advances the state’s conformity to the Internal Revenue Code (IRC) from January 1, 2015, to January 1, 2025, for taxable years beginning on or after that date, thereby bringing California into line with hundreds of federal tax changes made over the past decade. This alignment is designed to simplify compliance and reduce costly inconsistencies between federal and state returns. But conformity also comes with caveats, and taxpayers will need to understand where California continues to chart its own course.
The major changes introduced by SB 711
Updating California’s IRC “conformity date” to January 1, 2025, the bill incorporates several federal amendments enacted during the last decade. For example, one major innovation in SB 711 is the overhaul of California’s research credit. Starting in 2025, taxpayers may use the Alternative Simplified Credit method under IRC § 41(c)(4), which was adjusted with lower state percentages for qualified research expenses (3% and 1.3% instead of 14% and 6%). Other notable modifications include conformity to federal limitations on IRC § 1031 exchanges to real property and the elimination of the deferral for exchanges of certain non-real property.
Of course, many instances of nonconformity to recent federal enactments remain, including:
- Corporate alternative minimum tax (CAMT). SB 711 continues to exclude the new federal CAMT, created by the Inflation Reduction Act of 2022 (IRA), from conformity.
- Renewable energy credits. SB 711 does not adopt the clean energy credits added under the IRA.
- Net operating loss rules. California continues to diverge from federal carryback and carryforward limits.
- IRC 163(j). SB 711 continues nonconformity to interest expense limitations under IRC § 163(j).
- One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Because SB 711 conforms to the IRC as of January 1, 2025, it does not include changes made under the OBBBA, which was signed by US President Donald Trump earlier this year.
Preparing for the transition
SB 711 applies to both the personal income tax and corporation tax regimes for taxable years beginning on or after January 1, 2025. Taxpayers should begin modeling how the new conformity affects their liabilities and planning strategies. Key steps include:
- Reviewing federal provisions now incorporated into state law.
- Identifying exceptions and modified rules applicable to your business or filing type.
- Consulting tax professionals to evaluate the impact on research and development incentives, loss carryovers, and credit eligibility, among others.
- Monitoring California Franchise Tax Board guidance as the agency clarifies implementation details over the coming months.
Bottom line
SB 711 represents California’s latest move to more closely synchronize its tax code with the modern federal landscape. The reform promises greater clarity, fewer compliance headaches, and a more innovation-friendly framework. Yet, with selective decoupling and transitional complexities, taxpayers will need to remain vigilant. In short, California may finally be closer to being in sync – but understanding the fine print remains essential.
