CaliforniaSB 7112025-2026 Regular SessionSenateWALLET

School nutrition: guardian meal reimbursement.

Sponsored By: Jerry McNerney (Democratic)

Signed by Governor

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Bill Overview

Analyzed Economic Effects

79 provisions identified: 27 benefits, 25 costs, 27 mixed.

Tax credit for historic building rehab

From January 1, 2021 through November 30, 2027, California offers a historic rehabilitation tax credit. Most projects get 20% of qualified rehab costs; some certified historic structures get 25% if they meet public‑benefit or location rules. Homeowners can instead claim a one‑time $5,000–$25,000 credit for a qualified residence once every 10 tax years, with a $200,000 modified AGI cap and occupancy rules. Credits are allocated under a $50 million yearly cap with set‑asides, and unused credits carry forward seven years. Projects must meet federal rehabilitation standards and may face recapture if they fall out of compliance.

Child care tax credit for families

California lets you claim a child and dependent care tax credit based on your federal amount. For tax years from 2003 on, the state percentage is 50% if your AGI is $40,000 or less; 43% if over $40,000 up to $70,000; 34% if over $70,000 up to $100,000; and 0% if over $100,000. Care must be provided in California. Earned income counts only if it is taxed by California. The special 2021 federal rule does not apply for California.

Up to $500K mortgage debt tax‑free

If your main‑home mortgage debt is forgiven on or after January 1, 2007, California lets you exclude up to $500,000 from income. If you are married filing separately, the limit is $250,000.

Faster write-offs and earlier charity deductions

You can elect a 20% first‑year allowance for qualifying Section 24356 property to lower taxable income right away. An accrual‑basis corporation can also treat a board‑approved gift as paid in that year if it is paid by the 15th day of the fourth month after year‑end. Make these elections on the state return as required.

PPP and EIDL relief untaxed

Beginning January 1, 2019, forgiven PPP loans and certain EIDL advances are not taxed by California. Ineligible entities, like many publicly traded companies or those that fail gross‑receipts tests, do not get this break. The Franchise Tax Board issues guidance without formal rulemaking.

Research credit limited to California work

California uses its own rules for the research and development tax credit. The credit applies only to research done in California and uses state‑set base rates and elections. Special election rules apply through 2025, with updated simplified credit rates for tax years beginning on or after January 1, 2025.

Credit for fixing historic buildings

The state offers a credit equal to 20% of qualified rehab costs, or 25% for certain projects. There is a $50 million yearly cap through 2027 and an $8 million set‑aside for small projects under $1 million. Projects need cost certification (CPA required over $250,000). The section repeals December 1, 2027.

Stricter rule for travel deductions

You cannot deduct travel, meals, or lodging unless the trip had no significant personal, recreation, or vacation element. This applies to business and work travel costs. Many filers who used to deduct these costs will owe more tax unless they meet this strict test.

Lower expensing limits in California

California caps Section 179 expensing at $25,000 per year and reduces it when property costs exceed $200,000. The 20% first‑year allowance applies to only $10,000 of cost (max $2,000 deduction). The state does not adopt several federal Section 179 expansions or election rules. This lowers immediate write‑offs on California returns.

No bonus depreciation in California

California does not follow federal bonus depreciation and special allowances. You cannot claim those accelerated write‑offs on your state return. You must use California’s depreciation rules instead.

No 20% business income deduction

California does not allow the federal 20% qualified business income deduction. Owners of pass‑through businesses must pay state tax on that income without this federal break.

Optional 9.3% tax for pass-throughs

For tax years starting on or after 2021 and before 2026, a qualified pass‑through can elect to pay a 9.3% tax on its qualified net income. The choice is made on the original, on‑time return and cannot be changed for that year. The election binds owners as the law specifies.

Corporate AMT base change and credit rules

California removes the federal adjusted financial statement income rule from state AMT. The state also changes how the minimum tax credit is computed by modifying which credits reduce regular tax and by not applying a federal corporate clause. These changes alter who owes AMT and how credits carry forward.

R&D tax credit rules change

To claim the California R&D credit, most qualifying research must be done in California. Credit percentages and options change, including for tax years starting on or after January 1, 2025. Some costs already exempt from sales/use tax do not count for the credit.

Carried interest keeps favorable treatment

California does not adopt the federal carried‑interest change in IRC 1061. Partners and service providers with carried interest keep the state’s more favorable treatment in many cases. This can lower California tax on those gains.

No excess farm loss; losses carry forward

California does not use the federal excess farm loss limit. If you have excess business losses, the disallowed amount carries over to the next year. This can reduce current tax or preserve losses for later.

Farm tax help for vines and livestock

If you replant grapevines due to phylloxera or Pierce’s disease, California treats them as five‑year property with a 10‑year class life. Keep a written certification from a qualified adviser or the State Agricultural Commissioner. Sales of livestock due to drought, flood, or other weather are treated under special timing for sales after December 31, 1996, but not for tax years starting on or after January 1, 1998.

More employer deductions for benefits and credits

California keeps employer deductions for certain fringe benefits that federal law limits. The state also does not apply the federal rule that can cut deductions when you claim some employment or research credits. This can lower state taxable income for employers.

California keeps its own NOL rules

The law keeps California’s net operating loss (NOL) rules and does not use recent federal changes. For losses from 2013–2018, you can carry them back two years: 50% of 2013 losses, 75% of 2014 losses, and up to 100% for 2015–2018. The share of a loss you can carry forward depends on when it began: 50% before 2000, 55% in 2000–2001, 60% in 2002–2003, and 100% for 2004 or later. This changes how much past and future income your business can offset.

Friendlier state rules for research costs

California uses the older federal research expense rule from January 1, 2015. Businesses can deduct research and experimental costs under pre‑2017 rules for state tax.

More employer write‑offs for some perks

California does not adopt federal limits on certain fringe‑benefit deductions. Employers can keep using the state’s prior, more generous deduction rules for those benefits. This lowers state taxable income for some employers.

Older rules for ownership changes, cross‑border moves

California does not adopt certain federal changes to Section 367(a) and Section 382. Companies follow the state’s older rules for property transfers to foreign corporations and for using NOLs after ownership changes. This can be more favorable than the federal approach in some cases.

No state break for OZ and QSBS

California does not allow the federal basis increase for Opportunity Zone investments. The state also does not adopt the federal 100% gain exclusion for qualified small business stock. California does not allow federal capital loss carrybacks. Investors may face higher state tax on gains and fewer tools to offset prior‑year income.

Older rules for disaster loss deductions

For California taxes, personal casualty and disaster losses follow the state’s older rules. California does not adopt recent federal expansions to these loss rules. Your state deduction may be smaller than your federal deduction.

State tax deduction limits remain

California does not adopt certain federal SALT deduction rules. You cannot use those federal provisions to deduct more state, local, or foreign taxes on your California return. The state also denies deductions for specified California‑imposed taxes.

Fines for unregistered tax preparers

Tax preparers who fail to register face a $2,500 fine the first time and $5,000 after that. The first fine is waived if proof of registration is provided within 90 days. The Franchise Tax Board imposes these only after it has funding or an agreement to cover costs.

New limits on business loss carryovers

California changes how net operating losses (NOLs) work. Percent limits and carryover periods vary by the year of the loss. New and small businesses (under $1,000,000 in gross receipts) get special carryover rules. These changes can limit how much loss you can use each year.

New rules after federal partnership audits

If a partnership gets a final federal audit change, it must report it to California within six months. The Franchise Tax Board can collect a partnership‑level tax using the highest state rates, unless the partnership makes a permitted election. These rules apply to the federal regime in place on January 1, 2018.

Partnerships use CA rates for withholding

Partnerships must withhold using California tax rates on California‑source income paid to foreign partners. The state replaces federal rates with California’s maximum rates. This can change how much cash is withheld and remitted.

S corps face longer built-in gains tax

S corporations owe California tax on built‑in gains from California sources. The recognition period is 10 years, not 5. Tax credits cannot reduce this built‑in gains tax.

Corporate charity write‑offs capped

Corporate charitable deductions are limited to 10% of adjusted net income each tax year. Amounts above the cap are not deductible. This sets a firm ceiling on corporate giving write‑offs in California.

Limits on deducting executive pay

California applies tighter limits on deducting executive compensation, using March 31, 2019 as the effective date. The state also removes part of the federal covered‑employee definition for state purposes. These rules change which high‑paid compensation is deductible on state returns.

No state deduction for certain federal excises

Corporations cannot deduct the federal stock buyback excise tax when computing California income. The federal designated drug excise tax is also not deductible for California tax. These rules can raise state taxable income for affected companies.

Stronger penalties and foreign‑owner filings

Certain foreign‑owned entities must submit federal information (Sections 6038A–D) to the state for years starting on or after January 1, 2016. The state sets a $10,000 penalty for some failures and uses state subpoenas and courts. Businesses that file incorrect information returns or payee statements face state penalties. There is also a $10 per‑failure penalty for missing rollover explanations, capped at $5,000 per year. Some changes apply to returns filed on or after January 1, 2016, and others to returns required on or after January 1, 2026.

1031 exchange rules tied to income

For exchanges completed after January 10, 2019, California applies federal 1031 real property rules only if AGI is $500,000 or more (married filing jointly or head of household) or $250,000 or more (single). For tax years starting on or after January 1, 2025, this income test goes away.

529 college plan: some withdrawals taxed

California mostly follows federal 529 rules for ScholarShare, but it treats some federal “qualified” distributions as taxable. Rollovers to Roth IRAs can be taxed in California. You may need to file federal 529 reports with the Franchise Tax Board. These rules define which federal 529 changes the state does or does not adopt.

Alimony taxed under older rules, time-limited

California uses the pre‑2019 federal alimony rules for state taxes. This does not apply to divorce or separation instruments executed after December 31, 2025, and ends December 1, 2027. Nonresidents and part‑year residents with pre‑2026 instruments can claim a pro‑rata alimony deduction based on their California income share.

AMT relief for small businesses and filers

California uses its own AMT rates and exemption amounts, adjusted yearly for inflation. Income from a trade or business of a qualified taxpayer with under $1,000,000 in gross receipts is excluded from AMT. These rules change who pays AMT and how much.

California rules for donations and itemized deductions

California keeps older percentage limits and other state rules for charitable deductions. For conservation donations by pass‑throughs made on or after January 1, 2024, the state applies most new federal rules but leaves out a federal regulations clause. The 2% floor on certain itemized deductions still applies in California; the federal suspension does not apply here. High‑income donors and investors may see different results on state returns than on federal returns.

Deferred comp and rollovers differ in CA

For years before 2025, elective deferrals are excluded only up to the federal amounts in effect on January 1, 2010. Some federal rollover rules do not apply in California, and certain 529‑to‑Roth rollovers are taxable here. California applies basis and timing rules from 2002 for deferrals not excluded.

Divorce and alimony tax rules reset

California applies pre‑2019 alimony tax rules for qualifying divorce or separation instruments. Payments can be deductible to the payer and taxable to the recipient only for instruments executed on or before December 31, 2025, and not later modified unless the change says so. For certain divorce‑related trust and estate payments, the recipient spouse is treated as the beneficiary. These rules do not apply to instruments executed after December 31, 2025. Both sections repeal on December 1, 2027.

Luxury car depreciation uses CA rules

California applies its own rules for depreciating luxury vehicles. The state does not adopt certain 2017 federal limits and uses California recovery periods. This can raise or lower your deduction compared with federal law, depending on your car and facts.

Rules for long-term contract income

California sets timing rules for reporting income on long‑term contracts. Some income is adjusted when the contract finishes. Which rules apply depends on when the contract was signed. Changes in accounting methods need Franchise Tax Board consent.

S‑corp rules align; 338 follows federal

California generally follows federal S‑corporation rules, but not the federal rule for cash distributions after the post‑termination period. If an S‑corp or its owners made a federal Section 338 election, California treats it as made for state purposes. You cannot make a state‑only 338 election.

Targeted tax rules for insurers and facilities

If you transfer property to an insurer in certain exchanges, California defers the gain while the insurer owns and uses it in its business. Amortization for pollution control facilities is allowed only for facilities in California, with state certification. Small life insurers keep a state deduction that federal law repealed.

Business accounting timing differs from federal

California sets its own rules for long‑term contract accounting and lets you elect to apply them to contracts entered on or after January 1, 2018. The state does not use federal timing rules for sales tied to electric restructuring or for certain credit‑card fees. California also does not apply federal Section 56A (adjusted financial statement income). The federal S‑to‑C conversion adjustment rule does not apply for California.

Corporate AMT rates and credits

California uses federal alternative minimum tax (AMT) rules as of January 1, 2015, with state changes. The AMT rate is 7%, or 6.65% for tax years starting in 1997 or later. Some qualifying S corporations are exempt from this AMT chapter. Corporations can use a state minimum tax credit based on federal rules, as modified. Technical adjustments change what counts for AMT.

Interest deductions bigger, no carryforward

California does not use the federal cap on business interest deductions. Businesses can generally deduct more interest for state tax. But the state also does not allow the special federal carryforward rule for disallowed interest. Net result: more current deduction room, but no federal-style carryforward relief.

More flexible R&D costs and credits

Beginning with years starting in 2022, California does not adopt the federal rule that forces amortization of research costs. Businesses can follow the state’s prior, often more favorable, treatment. The state also applies some federal research credit rules but excludes certain federal changes and uses state cross‑references. This changes how you expense R&D and how related credits apply.

Pension plan tax rules align with federal

California applies federal pension and minimum funding rules without regard to taxable year, except where state law says otherwise. Employers and plan sponsors follow the same application timing as federal law, subject to listed exceptions.

State decouples from some federal corporate limits

California does not allow the federal carryforward of disallowed business interest. The state also does not adopt certain federal loss‑limitation rules after ownership changes. But California does not adopt a 2017 federal repeal that removed a transfer exception for business property, keeping the prior exception for state tax.

AGI rules for domestic partners

For AGI‑based limits, a registered domestic partner’s AGI is figured like a spouse for federal purposes, using the same filing status as on the state return. This aligns state AGI rules and can change eligibility for some deductions and credits.

Creators keep old tax treatment

California does not adopt the federal change that reclassified certain self‑created property. The state keeps the prior treatment. This can help creators who hold self‑created property.

Estates and trusts can file on paper

The Franchise Tax Board cannot force estate and trust returns to use other formats. Paper forms are accepted. If IRS rules require magnetic‑media filing, the state may accept a copy of your IRS magnetic‑media return and cannot demand more than the IRS requires.

Gambling loss rules stay the same

California does not adopt the 2017 federal change to wagering losses. You keep using the prior California treatment for gambling losses.

Higher and indexed retirement catch-ups

California adopts higher and indexed IRA and SIMPLE plan catch‑up limits. People aged 60 through 63 can use higher catch‑up amounts. The Legislative Analyst’s Office must report by October 1, 2029 on usage and revenue effects.

Lawmakers’ home district counts as tax home

If you are a California legislator and live in the district you represent, that home is your tax home. You may treat some travel expenses as job‑related. Federal special rules for legislators’ travel do not apply for California taxes.

Lower medical write-off floor (before 2021)

For tax years beginning before 2021, you can deduct medical expenses once they exceed 7.5% of AGI. This replaces a 10% floor for those years. AGI means your adjusted gross income for the year.

Moving and bike reimbursements stay tax‑free

California still excludes qualified bicycle commuting reimbursements from income. California also keeps the exclusion for qualified moving reimbursements and allows moving expense deductions. This applies even though federal law suspended these breaks for 2018–2025.

Outreach to boost Earned Income Credits

The law defines terms for outreach to people likely to qualify for the federal and California Earned Income Tax Credits and free tax help. It lets state agencies use program data to find and serve eligible people. This improves access to tax help and credits.

Tax break for disabled first responders

Beginning with tax years starting January 1, 2027, California adopts the federal rule for certain disability‑related retirement payments to first responders. Qualifying payments are excluded from state taxable income.

Tsunami donations can count for 2004

If you gave cash in January 2005 to help victims of the December 26, 2004 Indian Ocean tsunami, you can treat it as given on December 31, 2004. That lets you claim the deduction on your 2004 California return.

Small life insurers keep deduction

California keeps the small life insurance company deduction that federal law repealed. Eligible insurers can still claim this deduction on their California returns. This lowers state taxable income for those companies.

Different rules for foreign income and credits

California excludes several federal items when figuring state tax. Examples include the foreign earned income exclusion, many foreign tax credit and foreign trust rules, and some special corporate elections. If you have foreign income or special federal credits, your California treatment can differ and your state tax can be higher.

East Palestine relief taxable in California

California does not adopt the federal exclusion for East Palestine disaster relief payments. If you received these payments, they may be taxable on your California return.

HSAs and small HRAs taxable in CA

California does not adopt federal rules for Health Savings Accounts or small‑employer HRAs. Employer contributions and reimbursements under those arrangements may be taxable on your California return.

Longer state audit window: four years

For items tied to federal three‑year limits, California uses a four‑year period. The Franchise Tax Board has one extra year to audit and assess tax. Keep records for at least four years for those items.

Longer window for big income omissions

If you left out more than 25% of gross income, California can assess extra tax up to six years after you filed. For estimated tax underpayments, years starting in 1998 or later use a 100% applicable percentage (95% applies only to years before 1998). The law also repeals an older tax code section that no longer applies.

No state deduction for mortgage insurance

Mortgage insurance premiums are not treated as deductible interest for California taxes. You may get a smaller deduction than on your federal return.

Some disaster and energy payments taxed

Certain federal wildfire disaster compensation and coal power grants are not excluded from California income. If you received these payments, you may owe California tax on them.

Check cashers must report over $10,000

If you cash non‑excluded checks over $10,000 for a person in one deal or across the year, you must file a report with the state. File within 90 days after year‑end. Penalties apply for failing to file or leaving out required details.

Charity proof accepted; no non-itemizer break

If you meet federal proof rules for a charitable gift, California allows the deduction. But the state does not allow the federal non‑itemizer charitable deduction. Standard‑deduction filers cannot claim that special break on California returns.

Different tax on retirement withdrawals

California changes how some IRA and annuity payouts are taxed. The state may reduce taxable distributions by the lesser of your federal income inclusion or your state‑allowed basis. Some additional tax rates use 2.5% or 6% instead of federal rates. Several recent federal changes to these rules do not apply in California.

Federal tax elections count for California

A proper federal tax election is usually treated as your California election too. You must provide a copy to the state if asked. Elections made before you were subject to California tax generally carry over, and separate state elections are usually not allowed unless state law says so.

State locks in federal tax code

Beginning January 1, 2025, California uses the federal tax code as it read on that date. Later federal changes do not apply unless state law adopts them. For the state AMT, California keeps using the federal AMT rules as of January 1, 2015. When a rule refers to federal Section 501 status, California uses the matching state nonprofit rule (Section 23701).

ESOP rollover rules by corporation type

California follows ESOP rollover rules with state changes. For tax years 1998–2027, only domestic C corporations qualify. For tax years starting in 2028, the S corporation stock rule applies. Sales to eligible farm cooperatives are not adopted.

Old tax code sections repealed

California repeals Sections 17275.3, 17276.05, and 24462 of the state tax code. The practical effects depend on what those sections used to do. The law removes them from the code.

REIT federal special rule not used

California does not follow a specific federal REIT special rule. REITs use California’s prior tax rules instead of that federal provision. Effects depend on each REIT’s structure and activity.

Some strip‑bond rules not adopted

California does not adopt two recent federal changes to Section 860E. Investors in affected instruments do not get state‑level changes those federal revisions created. State tax treatment follows California’s prior approach.

Sponsors & Cosponsors

Sponsor

Jerry McNerney
Democratic • Senate

Cosponsors

There are no cosponsors for this bill.

Roll Call Votes

All Roll Calls

Yes: 168 • No: 3

Senate vote • 9/11/2025

Item 47 — Senate SFLOOR

Yes: 40 • No: 0

House vote • 9/9/2025

Item 159 — Assembly AFLOOR

Yes: 58 • No: 1

legislature vote • 8/29/2025

Vote in CX25

Yes: 11 • No: 1

legislature vote • 7/14/2025

Vote in CX19

Yes: 4 • No: 1

Senate vote • 5/28/2025

Item 195 — Senate SFLOOR

Yes: 38 • No: 0

legislature vote • 5/23/2025

Vote in CS61

Yes: 6 • No: 0

legislature vote • 5/12/2025