California has somewhat unusual conformity to the Internal Revenue Code in that the state: (1) does not adopt the Code as a whole, but incorporates only certain provisions by reference; and (2) only rather sporadically advances the conformity date for the sections of the Code that are incorporated into California law.
California’s governor on July 1, 2019, signed Assembly Bill 91, the “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019.” The “loophole” closures in the bill generally adopt certain provisions of the U.S. 2017 federal tax law (Pub. L. No. 115-97)—the law that is commonly referred to as the “Tax Cuts and Jobs Act” (TCJA)—that is, provisions that benefitted businesses when California did not conform.
California continues in general to conform to the Internal Revenue Code as of January 1, 2015. However, under Assembly Bill 91, California adopts the following TCJA changes for tax years beginning on or after January 1, 2019 (unless otherwise noted):
In addition to adopting these TCJA changes, Assembly Bill 91 eliminates the ability for taxpayers to make separate state and federal elections under IRC section 338. This change is effective for acquisitions made on or after the date the bill was signed (July 1, 2019) unless the acquisition was subject to a binding contract that was entered into before July 1, 2019, and the contract remains binding at all times after that date.
California remains decoupled from all of the other TCJA provisions affecting businesses, including the international changes and the limitations on the deductibility of interest expenses under IRC section 163(j). Furthermore, the few provisions that California adopts under Assembly Bill 91 will not affect 2018 returns because they generally apply beginning with the 2019 tax year. While there were always significant “disconnects” between California and federal law, going forward these disconnects will likely lead to additional complexities when preparing California returns.
For more information, contact a KPMG State and Local Tax professional:
Gina Rodriquez | +1 916-551-3132 | firstname.lastname@example.org
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