Precision Updates
Tax Planning Business Owners 2026

California Conformity & Nonconformity 2026 – Key Differences Business Owners Must Track

Parsi Team Content Group — Reviewed by Parsi Team, CPA
August 11, 2026 Last Reviewed: August 11, 2026 9 min read
Prepared by Parsi Team

This article was drafted by the Parsi Team content group and subjected to technical, legal, and compliance review and final approval by Parsi Team, CPA, prior to publication.

California generally conforms to the Internal Revenue Code as of a specified date, but numerous selective nonconformity provisions remain in force. Business owners and high-income individuals who prepare a single set of books for both federal and California purposes must maintain side-by-side tracking of these differences. This article summarizes the principal areas of nonconformity that continue to affect 2026 taxable income computations. The discussion is educational and does not address any taxpayer's specific facts.

What This Article Covers

This article covers the current California conformity date, the major permanent and temporary differences that affect 2026 business and individual returns, the treatment of bonus depreciation and Section 179, state tax deduction limitations, and the official FTB publications used to compute California adjustments.

1. Current Conformity Framework

California's conformity statute (Revenue and Taxation Code §17024.5 and related provisions) generally adopts the Internal Revenue Code as of a fixed date, with subsequent federal changes requiring affirmative state legislation. As of mid-2026, California remains selectively nonconforming on a number of TCJA and post-TCJA provisions. Taxpayers therefore prepare a federal Form 1040 (or business return) and then apply a series of California addition and subtraction adjustments on Schedule CA (540) or the corresponding business forms.

Federal vs. California Treatment 2026 Federal allows 100% bonus depreciation, a $1,330,000 Section 179 limit, a $10,000 SALT cap, favorable NOLs, a 20% R&D credit, and no federal PTET deduction. California does not conform to bonus depreciation (MACRS only), conforms on Section 179 and SALT, has no R&D credit, allows an elective PTET, and imposes a 1% Mental Health Services Tax. FEDERAL TREATMENT 2026 CALIFORNIA TREATMENT 2026 BONUS DEPRECIATION 100% bonus depreciation allowed ✓ ALLOWS BONUS DEPRECIATION No conformity. MACRS only. ✕ DOES NOT CONFORM SECTION 179 LIMITATIONS Up to $1,330,000 limit ✓ ALLOWS SECTION 179 LIMITATIONS Up to $1,330,000 limit ✓ CONFORMS SALT DEDUCTION Up to $10,000 cap ✓ ALLOWS (LIMIT) SALT DEDUCTION Full state/local deduction ✓ CONFORMS NET OPERATING LOSSES Unlimited carryforward, 80% limit ✓ FAVORABLE NET OPERATING LOSSES Carryforward, no carryback ✓ CONFORMS R&D CREDIT Up to 20% credit ✓ ALLOWS R&D CREDIT Separate CA computation ✕ DOES NOT CONFORM PASS-THROUGH ENTITY TAX No federal PTET deduction ✕ NOT AVAILABLE PASS-THROUGH ENTITY TAX Elective PTET allowed ✓ ALLOWED MENTAL HEALTH SERVICES TAX 1% on income over $1M ! APPLIES KEY TAKEAWAY: California conforms on many items, but not on bonus depreciation or the R&D credit, and adds PTET + Mental Health Services Tax.
Figure 1 — Federal vs. California treatment of key 2026 provisions.

2. Bonus Depreciation and Section 179 – Ongoing Nonconformity

Federal law continues to allow 100 percent bonus depreciation for qualified property placed in service in 2026 (subject to any phase-down schedule enacted by Congress). California does not conform to federal bonus depreciation. Instead, California requires depreciation under the MACRS system without the additional first-year bonus percentage. Section 179 expensing is also subject to California-specific dollar and investment limitations that differ from the federal amounts.

⚠ Important Note

Because of this permanent difference, businesses that claim federal bonus depreciation must maintain a separate California fixed-asset and depreciation schedule. Failure to do so produces incorrect California taxable income and can generate underpayment penalties on the California return.

Bonus Depreciation: Federal vs. California For $100,000 of equipment placed in service in 2026, federal 100% bonus depreciation allows a $100,000 first-year deduction, while California (MACRS only, 7-year first-year rate 14.29%) allows roughly $14,300. Separate federal and California schedules are required. Bonus Depreciation — the most significant permanent difference between federal and California tax treatment FEDERAL TREATMENT 100% BONUS DEPRECIATION 100% IMMEDIATE EXPENSING Deduct full cost in year placed in service. EXAMPLE · $100,000 EQUIPMENT Federal Deduction (2026) $100,000 RESULT: Lower taxable income year one. Better cash flow. VS. CALIFORNIA TREATMENT MACRS ONLY — NO BONUS RECOVER COST OVER TIME Depreciate using CA MACRS percentages, without the benefit of bonus depreciation. EXAMPLE · $100,000 EQUIPMENT California Deduction (2026) $14,300* *7-Year MACRS, 1st-year 14.29% (2026) RESULT: Higher taxable income early. No immediate benefit. IMPORTANT: SEPARATE CALIFORNIA FIXED-ASSET AND DEPRECIATION SCHEDULES ARE REQUIRED when federal bonus depreciation is claimed. 1 · Maintain separate schedules 2 · Track depreciation differences yearly 3 · Monitor impact on taxable income & cash flow
Figure 2 — Federal 100% bonus vs. California MACRS-only, on a $100,000 asset.

3. Other Material Differences Affecting 2026 Returns

Common permanent or temporary differences that business owners track include:

  • State and local tax (SALT) deduction: the federal itemized deduction is limited to $10,000 ($5,000 MFS). California does not allow a deduction for California state income tax on the California return.
  • Net operating losses: California has its own NOL carryover rules, percentage limitations, and suspension periods that have historically differed from federal.
  • Research and development credit: California maintains a separate credit computation and does not fully conform to the federal research credit.
  • Pass-through entity (PTE) tax: California's elective PTE tax (and the corresponding federal §164(b)(6) workaround) creates California-specific timing and credit interactions.
  • Opportunity Zone and certain capital-gain deferral provisions: California has limited or delayed conformity.
  • Mental Health Services Tax: an additional 1 percent tax on taxable income over $1 million that has no federal counterpart.

4. Estimated-Tax and Safe-Harbor Implications of Nonconformity

Because California taxable income often differs from federal taxable income, the "current-year tax" used for the 90 percent safe-harbor test under California §19136 is a California-specific number. High-income taxpayers (current-year AGI ≥ $1,000,000) who must use the 90 percent current-year method therefore need an accurate mid-year projection of California taxable income after all nonconformity adjustments.

For the complete 2026 estimated-tax rules, see Quarterly Estimated Taxes 2026 – How to Avoid Underpayment Penalties. Mid-year entity planning that interacts with these differences is covered in Mid-Year Tax Check-Up 2026 – A Strategic Guide for Business Owners, and the fixed-asset angle in Fixed Asset Review & California Depreciation Planning 2026.

Compliance Resources and Tools

Authoritative guidance on California adjustments is contained in:

  • FTB Publication 1001, Supplemental Guidelines to California Adjustments.
  • FTB Form 540 Schedule CA instructions.
  • FTB Form 100 / 100S / 100W instructions (business entities).
  • IRS Publication 946 (federal depreciation) used as the starting point for the California depreciation worksheet.

These publications are available free of charge on ftb.ca.gov and irs.gov and contain the complete lists of addition and subtraction modifications for the current year.

Key Takeaways
  • California maintains selective nonconformity with the Internal Revenue Code; bonus depreciation is the most common permanent difference for capital-intensive businesses.
  • Separate California fixed-asset and depreciation schedules are required when federal bonus has been claimed.
  • The SALT cap, NOL rules, R&D credit, and PTE tax create additional California-specific adjustments.
  • The California 90 percent current-year safe harbor (mandatory for AGI ≥ $1 million) is computed on California taxable income after all nonconformity adjustments.
  • Official FTB Publication 1001 remains the primary reference for the annual list of California modifications.
  • Accurate side-by-side tracking reduces the risk of underpayment penalties and post-filing adjustments.

References

  1. Franchise Tax Board. Publication 1001, Supplemental Guidelines to California Adjustments. ftb.ca.gov/forms (accessed August 11, 2026).
  2. Franchise Tax Board. Estimated tax payments. ftb.ca.gov (accessed August 11, 2026).
  3. Internal Revenue Service. Publication 946, How To Depreciate Property. irs.gov/publications/p946 (accessed August 11, 2026).
  4. Internal Revenue Service. Topic no. 306, Penalty for underpayment of estimated tax. irs.gov/taxtopics/tc306 (accessed August 11, 2026).
  5. Internal Revenue Service. About Form 4562, Depreciation and Amortization. irs.gov/forms-pubs/about-form-4562 (accessed August 11, 2026).
Disclaimer

The information contained in this publication is provided for educational and general informational purposes only. It does not constitute tax advice, accounting advice, legal advice, or any other form of professional advice and does not create a client-professional relationship.

The content reflects tax law and regulations applicable on the date of publication only and is subject to change without notice. Examples and illustrations are hypothetical and do not represent any specific taxpayer situation. Past results or referenced positions do not guarantee future outcomes.

No reader should act or refrain from acting on the basis of this publication without first obtaining specific written advice from a licensed CPA based on the reader's individual facts and circumstances.

Any federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

Parsi Team Specific Notice: This publication was prepared by non-licensed content personnel under the direct supervision and final approval of a licensed CPA. The reviewing CPA assumes professional responsibility for the technical accuracy and compliance of the content. All other limitations stated in the disclaimer above remain fully applicable.