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Navigating the Divide: California’s Key Non-Conformity Pitfalls Under the One Big Beautiful Bill Act (OBBBA)

At Brave New Wealth, our focus is on strategically navigating tax complexities. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, introduces sweeping federal tax changes—none of which California automatically adopts due to its static 2015 conformity date. The result: freshly emerged “gotchas” that demand attention for both compliance and planning.

California’s Static Conformity Principle: The Root of Divergence

California's adherence to static conformity means it does not automatically adopt federal tax code updates. Since California’s conformity date remains January 1, 2015, the sweeping changes introduced by OBBBA are not recognized in California unless specifically adopted by state legislation.

Critical Non-Conformity "Gotchas" Under OBBBA

Here are the primary areas where taxpayers must be especially vigilant:

  1. Permanent Bonus Depreciation

    • Federal: OBBBA makes 100% first-year bonus depreciation permanent.

    • California Gotcha: California remains non-conforming—no bonus depreciation allowed. Businesses must maintain dual depreciation schedules for federal vs. California purposes.

  2. Research & Development (R&D) Expensing

    • Federal: OBBBA restores immediate expensing post‑2024 and retroactive relief for prior capitalized amounts.

    • California Gotcha: While California always allowed immediate expensing, it does not conform to the retroactive relief—state taxpayers miss out on the federal catch-up benefit.

  3. Business Interest Expense Limitation (§163(j))

    • Federal: OBBBA reinstates a more favorable EBITDA standard for calculating interest deductions.

    • California Gotcha: California remains fully decoupled from §163(j). Interest deductions remain unrestricted at the state level but require distinct tracking from federal.

  4. Qualified Business Income (QBI) Deduction (§199A)

    • Federal: OBBBA permanently secures the 20% QBI deduction and expands thresholds.

    • California Gotcha: California still disallows QBI deductions entirely—pass-through businesses face higher effective state taxes.

  5. Health Savings Accounts (HSAs)

    • Federal: Contributions and earnings are tax-deductible and tax-free.

    • California Gotcha: California does not conform to HSA provisions. Contributions (including employer-paid), earnings, and distributions lose their tax-exempt status, requiring annual add-back to CA income.

  6. 529 Plan Withdrawals for K–12 Expenses

    • Federal: OBBBA expands qualified K–12 expenses immediately and increases the maximum annual withdrawal to $20,000 starting in 2026.

    • California Gotcha: California does not conform—K–12 withdrawals remain taxable and may trigger penalties. Families must anticipate reporting complexities and plan accordingly.

Navigating Strategic Complexity

Understanding these key "gotchas" isn't merely compliance—it’s essential for strategic tax planning. Differences around depreciation, R&D expensing, entity selection, HSAs, and 529 plans present both challenges and opportunities:

  • Businesses must meticulously maintain separate depreciation and R&D asset schedules.

  • Entities must critically evaluate structure choices considering California's non-conformity to QBI.

  • Individuals must proactively manage HSA tax reporting and carefully strategize 529 plan withdrawals.

Stay Vigilant, Stay Strategic

At Brave New Wealth, we emphasize proactive and informed navigation through complex tax landscapes. By identifying these specific non-conformity “gotchas” under OBBBA, you can pivot complexity into competitive advantage—ensuring proactive compliance and strategic financial outcomes.

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