California’s Selective Conformity to Federal Tax Reform 2017

California’s Selective Conformity to Federal Tax Reform 2017

California governor signed Assembly Bill 91 into law on July 1, 2019, which selectively conforms California’s tax laws to the 2017 federal tax reform.  The federal tax conformity is limited to certain targeted provisions of the 2017 federal tax reform and does not conform to most of the international provisions (including GILTI, FDII, BEAT, 163(j) interest limitation and so on).  Following are some of the key provisions adopted by California:

  • Repeal of net operating loss (NOL) carryback. NOL originated from taxable years beginning after December 31, 2018 can only be carried forward and cannot be carried back.
  • Eliminated a taxpayer’s ability to make California-only IRC section 338 elections. Certain stock acquisitions could be treated as asset purchases for California only with a valid election.  However, the new bill eliminated such California-only elective provision.
  • Repeal of the partnership technical termination provision.
  • Adopted the federal excess business loss limitation for tax years beginning on or after January 1, 2018.
  • Limited application of 1031 like-kind exchange to real property exchanges.
  • Adopted the federal simplification of small business accounting methods.

Note that all states incorporate parts of the federal tax code into their own system of taxation, but how they do so vary widely.  California is a Static (or “fixed date”) conformity state which incorporates the federal IRC as it existed at a specific point in time with an exception to certain provisions specifically decoupled or specified.  Unless otherwise specified, California generally conforms to the 2015 federal tax law.

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