California vs. the New Federal Tax Law: What Does Not Carry Over in 2026

What changed

California does not automatically adopt federal tax law. The state picks a conformity date and then decides, item by item, which later federal changes to follow. Legislation enacted in 2025 (SB 711) moved California's general conformity date to January 1, 2025. Because the major federal tax law was signed in July 2025, most of its provisions are not part of California law unless the Legislature adopts them separately.

The Franchise Tax Board publishes a running summary of federal changes and California's position on each. For 2026 it lists many of the business provisions business owners care about as items California does not follow.

The main differences for business owners

Source: FTB Summary of Federal Income Tax Changes. The result is that many businesses will carry two depreciation schedules, two taxable income figures and, often, a larger California bill than owners expect from reading federal headlines.

Compensation and benefits are different too

Professional services firm EY reviewed California's treatment of the federal compensation and benefits changes in March 2026. Among its points: health savings account contributions remain taxable wages for California, the dependent care assistance exclusion stays at $5,000 for California, and employer contributions to the new federal children's savings accounts are not excluded from California income. Payroll systems need separate state settings for these items, and owners should expect their California taxable wages to differ from the federal figure.

Who in San Diego County this affects

San Diego's economy leans on exactly the industries most affected: life sciences and tech in Sorrento Valley and Carlsbad, defense and manufacturing in Kearny Mesa and Otay Mesa, and tourism and hospitality across the coast.

• Companies buying equipment, vehicles or buildouts, which will see a large federal deduction and a small California one
• Pass-through owners who rely on the QBI deduction, which has no California equivalent
• Biotech, medtech, software and defense contractors with domestic R&D costs
• Restaurants, hospitality and service businesses with tipped or hourly staff
• Employers offering HSAs or dependent care benefits

What is still pending

AB 1550, a bill that would have created California versions of the tips and overtime deductions, was held on the Assembly Revenue and Taxation Committee's suspense file on April 27, 2026, according to the state's bill tracking site, and it has not become law. Until a bill is enacted, assume the federal treatment does not apply to the California return. California may also act on other provisions in future budget legislation, and we will update this page if that happens.

What to do before year end

1. Ask your CPA for a 2026 projection that shows federal and California taxable income side by side.
2. Keep separate federal and California fixed asset schedules, and check that your accounting system tracks both.
3. Size California estimated payments on California income, not on the lower federal number.
4. Confirm payroll treats HSA and dependent care benefits correctly for California wages.
5. If you are an S corporation or partnership owner, review the PTE elective tax, which can recover part of the federal value lost to the SALT cap.
6. Revisit big purchases and R&D timing with the California result in mind.

How Scalesight helps

Our tax planning work always models both returns, and our business tax preparation team maintains the separate state schedules. Owners can also have us prepare their personal returns, so the K-1 and the personal California return follow the same plan. If you want a second look at last year's California return, the free Growth Audit is the place to start.

Sources

• Summary of Federal Income Tax Changes, California Franchise Tax Board, 2026
• California law largely does not conform to OBBBA provisions affecting compensation and benefits, EY Tax News, March 18, 2026
• AB 1550 bill status, California Legislative Information, 2026
• 2026 Form 540-ES Instructions, California Franchise Tax Board, 2026

This is general information, not tax or legal advice. Tax rules change and the right answer depends on your facts, so talk with a CPA before acting on it.