Is It Time for a Federal Tax Conformity Bill in California?

The tax laws of most states are an off-shoot of the federal tax laws contained in the Internal Revenue Code (IRC). In California, the general rule is that California only conforms to federal law as it was in effect on a specified date. The “specified date” conformity to the federal IRC is currently January 1, 2015.

What does this mean? Unless California changes its specified conformity date, or if the state specifically enacts a statute that incorporates any federal tax law changes enacted by Congress after 2014, then it means that California will not generally conform to any of these federal tax law changes. This raises the obvious question whether it is time to enact a new “date change” conformity bill in this state?

Because California taxpayers and practitioners are working with the IRC in effect from eight years ago, there are numerous differences between California and federal tax laws. As a result, the fundamental problem for taxpayers with these state and federal differences is that they are required to make adjustments to the financial figures from their federal tax returns. The FTB provides a thorough discussion of specific areas of nonconformity in their Publication 1001.

The last successful federal tax conformity bill with a specified date change in this state was enacted on September 30, 2015. That measure was AB 154, whose primary purpose was to update the IRC reference in California law from January 1, 2009 to January 1, 2015. Taxpayers and practitioners waited six years for that specified date change bill.

California does not automatically conform to federal tax law changes. In other words, California requires a bill to be enacted in this state for California to conform to federal tax law changes. Some states use a similar approach to California (adopting the federal IRC by date reference), while other states use the IRC as a starting point.

Why does federal tax conformity matter to taxpayers and the State? While California and other states have their individual approaches to state taxation, such as rates, exemptions, etc., they all rely in part upon the federal IRC. The main purpose of conformity to federal tax law is to reduce the compliance burden of having an entirely separate state tax system. Conformity allows taxpayers, practitioners, and state tax administrators alike to rely on federal statutes, regulations, IRS rulings, etc. States also rely upon consistent definitions, the work done by federal audits, and tax enforcement.

After nearly eight years, it might be time to have California change its specified date of reference to the Internal Revenue Code.