Conformity

For updates regarding federal acts, go to ftb.ca.gov and search for conformity .

Federal Acts – In general, the R&TC does not conform to the changes under the following federal acts. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015, with modifications. For specific adjustments due to the following acts, see Schedule CA (540) specific line instructions:

American Rescue Plan Act (ARPA) of 2021 (enacted on March 11, 2021)

Consolidated Appropriations Act (CAA), 2021 (enacted on December 27, 2020)

Setting Every Community Up for Retirement Enhancement (SECURE) Act (enacted on December 20, 2019)

California Hope, Opportunity, Perseverance, and Empowerment (HOPE) for Children Trust Account Program – The California HOPE for Children Trust Account Act created the California HOPE for Children Trust Account Program for the purpose of providing an eligible child with a HOPE trust account. For taxable years beginning on or after January 1, 2023, California law allows an exclusion from gross income for any funds deposited, any investment returns accrued, and any accrued interest in a HOPE trust account and for any funds from a HOPE trust account that is withdrawn or transferred by an eligible youth. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17141.5.

Interagency Council on Homelessness Payment Exclusion – For taxable years beginning on or after January 1, 2023, California law allows an exclusion from gross income for payments received pursuant to the California Welfare and Institutions Code Section 8257 by members of the Interagency Council on Homelessness, its advisory committee, or its working groups who are or have been homeless. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17131.13.

Kincade Wildfire Exclusion – For taxable years beginning on or after January 1, 2020, and before January 1, 2028, California law allows a qualified taxpayer an exclusion from gross income for any qualified amount received in a settlement from Pacific Gas and Electric (PG&E) Company or its subsidiary relating to the 2019 Kincade Fire. If a qualified taxpayer included income for a qualified amount received from this settlement in a prior taxable year, the taxpayer can file an amended tax return for that year within the normal statute of limitations. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17139.2.

Zogg Wildfire Exclusion – For taxable years beginning on or after January 1, 2020, and before January 1, 2028, California law allows a qualified taxpayer an exclusion from gross income for any qualified amount received in a settlement from PG&E Company or its subsidiary relating to the 2020 Zogg Fire. If a qualified taxpayer included income for a qualified amount received from this settlement in a prior taxable year, the taxpayer can file an amended tax return for that year within the normal statute of limitations. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17139.3.

Discharge of Student Fees – For taxable years beginning on or after January 1, 2022, and before January 1, 2027, California law allows an exclusion from gross income for any amount of unpaid fees due or owed by a student to a community college that was discharged pursuant to California Education Code Section 32527. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17131.21.

Guaranteed Income Pilot Program Payment Exclusion – Beginning on June 30, 2022, and before July 1, 2026, California law allows an exclusion from gross income for any payments received by an individual from a guaranteed income pilot program or project that receives a grant pursuant to California Welfare and Institution Code Section 18997. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17131.12.

Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Relief Grant – For taxable years beginning on or after January 1, 2021, and before January 1, 2030, California law allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the California Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Relief Grant Program that is established by Section 12100.975 of the Government Code. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17158.

Turf Replacement Water Conservation Program – For taxable years beginning on or after January 1, 2022, and before January 1, 2027, California law allows an exclusion from gross income for any amount received as a rebate, voucher, or other financial incentive issued by a public water system, as defined, local government, or state agency for participation in a turf replacement water conservation program. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17138.2.

Fire Victims Trust Exclusion – For taxable years beginning before January 1, 2028, California law allows a qualified taxpayer an exclusion from gross income for any amount received from the Fire Victims Trust, established pursuant to the order of the United States Bankruptcy Court for the Northern District of California dated June 20, 2020, case number 19-30088, docket number 8053. If a qualified taxpayer included income for an amount received from the Fire Victims Trust in a prior taxable year, the taxpayer can file an amended tax return for that year within the normal statute of limitations. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17138.5.

Thomas and Woolsey Wildfires Exclusion – For taxable years beginning before January 1, 2027, California law allows a qualified taxpayer an exclusion from gross income for any amount received in a settlement from Southern California Edison for claims relating to the 2017 Thomas Fire or the 2018 Woolsey Fire. If a qualified taxpayer included income for an amount received from these settlements in a prior taxable year, the taxpayer can file an amended tax return for that year within the normal statute of limitations. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17138.6.

Reporting Requirements – Taxpayers may need to file form FTB 4197, Information on Tax Expenditure Items, with the tax return to report tax expenditure items as part of the Franchise Tax Board’s (FTB) annual reporting requirements under R&TC Section 41. To determine if you have an R&TC Section 41 reporting requirement, see the R&TC Section 41 Reporting Requirements section in 540, Personal Income Tax Booklet, or get form FTB 4197.

California Venues Grant – For taxable years beginning on or after September 1, 2020, and before January 1, 2030, California law allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the California Venues Grant Program that is administered by the Office of Small Business Advocate (CalOSBA). For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z and R&TC Section 17158.

California Microbusiness COVID-19 Relief Grant – For taxable years beginning on or after January 1, 2020, and before January 1, 2025, California law allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the California Microbusiness COVID-19 Relief Program that is administered by CalOSBA. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z.

Other Loan Forgiveness – For taxable years beginning on or after January 1, 2019, California law allows an exclusion from gross income for borrowers of forgiveness of indebtedness described in Section 1109(d)(2)(D) of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act as stated by section 278, Division N of the CAA, 2021. The CAA, 2021, allows deductions for eligible expenses paid for with covered loan amounts. California law conforms to this federal provision, with modifications. For California purposes, these deductions generally do not apply to an ineligible entity. “Ineligible entity” means a taxpayer that is either a publicly-traded company or does not meet the 25% reduction from gross receipts requirements under Section 311 of the CAA, 2021. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 3 or go to ftb.ca.gov and search for AB 80 .

Shuttered Venue Operator Grant – For taxable years beginning on or after January 1, 2019, California law allows an exclusion from gross income for amounts awarded as a shuttered venue operator grant under the CAA, 2021. The CAA, 2021, allows deductions for eligible expenses paid for with grant amounts. California law conforms to this federal provision, with modifications. For California purposes, these deductions do not apply to an ineligible entity. "Ineligible entity" means a taxpayer that is either a publicly-traded company or does not meet the 25% reduction from gross receipts requirements under Section 311 of Division N of the CAA, 2021. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 3 and R&TC Section 17158.3.

Small Business COVID-19 Relief Grant Program – For taxable years beginning on or after January 1, 2020, and before January 1, 2030, California law allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the COVID-19 Relief Grant under Executive Order No. E 20/21-182 and the California Small Business COVID-19 Relief Grant Program established by Section 12100.83 of the Government Code. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z.

Income Exclusion for Rent Forgiveness – For taxable years beginning on or after January 1, 2020, and before January 1, 2025, gross income shall not include a tenant’s rent liability that is forgiven by a landlord or rent forgiveness provided through funds grantees received as a direct allocation from the Secretary of the Treasury based on the CAA, 2021. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z.

Moving Expense Deduction – For taxable years beginning on or after January 1, 2021, taxpayers should file California form FTB 3913, Moving Expense Deduction, to claim moving expense deductions. Attach the completed form FTB 3913 to Form 540, California Resident Income Tax Return. For more information, see Schedule CA (540) specific line instructions in Part I, Section C, line 14, and get form FTB 3913.

Paycheck Protection Program (PPP) Loans Forgiveness – For taxable years beginning on or after January 1, 2019, California law allows an exclusion from gross income for covered loan amounts forgiven under the federal CARES Act, Paycheck Protection Program and Health Care Enhancement Act, Paycheck Protection Program Flexibility Act of 2020, the CAA, 2021, or the PPP Extension Act of 2021.

Also, the ARPA expands PPP eligibility to include “additional covered nonprofit entities” which includes certain Code 501(c) nonprofit organizations and Internet-only news publishers and Internet-only periodical publishers. California law does not conform to this expansion of PPP eligibility.

The CAA, 2021, allows deductions for eligible expenses paid for with covered loan amounts. California law conforms to this federal provision, with modifications. For California purposes, these deductions do not apply to an ineligible entity. “Ineligible entity” means a taxpayer that is either a publicly-traded company or does not meet the 25% reduction from gross receipts requirements under Section 311 of Division N of the CAA, 2021.

For more information, see specific line instructions for Schedule CA (540) in Part I, Section B, line 3 and R&TC Section 17131.8 or go to ftb.ca.gov and search for AB 80 .

SECURE Act Repeal of Maximum Age 70½ – The SECURE Act repealed the maximum age of 70½ for traditional IRA contributions. California law does not conform to this federal provision. For more information, see Schedule CA (540) specific line instructions in Part I, Section C, line 20.

Coronavirus Aid, Relief, and Economic Security (CARES) Act – The CARES Act was enacted on March 27, 2020. In general, the R&TC does not conform to the changes. California taxpayers continue to follow the IRC as of the specified date of January 1, 2015, with modifications. California law does not conform to the following federal provisions under the CARES Act:

Exclusion for certain employer payment of student loans

Health-savings account changes

The above list is not intended to be all-inclusive of the federal and state conformities and differences. For more information, see specific line instructions or refer to the R&TC.

Worker Status: Employees and Independent Contractors – Some individuals may be classified as independent contractors for federal purposes and employees for California purposes, which may also cause changes in how their income and deductions are classified. Proposition 22 was operative as of December 16, 2020, and may affect a taxpayer’s worker classification. For more information, see Schedule CA (540) specific line instructions in Part I, Section A, line 1a; Part I, Section B, line 3; Part I, Section C, line 15 and line 17; and Part II, line 4.

Rental Real Estate Activities – For taxable years beginning on or after January 1, 2020, the dollar limitation for the offset for rental real estate activities shall not apply to the low income housing credit program. For more information, see R&TC Section 17561(d)(1). Get form FTB 3801-CR, Passive Activity Credit Limitations, for more information.

Commercial Cannabis Activity – For taxable years beginning on or after January 1, 2020, and before January 1, 2030, California allows individuals and other taxpayers operating under the personal income tax law to claim credits and deductions of business expenses paid or incurred during the taxable year in conducting commercial cannabis activity. Sole proprietors are those that conduct a commercial cannabis activity that is licensed under California Medicinal and Adult-Use Cannabis Regulation and Safety Act (CA MAUCRSA). For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 3, and get form FTB 4197.

Excess Business Loss Limitation – The CARES Act made amendments to IRC Section 461(l) by eliminating the excess business loss limitation of noncorporate taxpayers for taxable year 2020 and retroactively removing the limitation for taxable years 2018 and 2019. California law does not conform to those amendments. Also, California law does not conform to the federal changes in the ARPA and the federal Inflation Reduction Act of 2022 that extend the limitation on excess business losses of noncorporate taxpayers for taxable years beginning after December 31, 2020, and ending before January 1, 2029. Complete form FTB 3461, California Limitation on Business Losses, if you are a noncorporate taxpayer and your net losses from all of your trades or businesses are more than $305,000 ($610,000 for married/RDP taxpayers filing a joint return). For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8p, and get form FTB 3461.

Alimony – California law does not conform to changes made by the TCJA to federal law regarding alimony and separate maintenance payments that are not deductible by the payor spouse, and are not includable in the income of the receiving spouse, if made under any divorce or separation agreement executed after December 31, 2018, or executed on or before December 31, 2018, and modified after that date (if the modification expressly provides that the amendments apply). For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 2a and Section C, line 19a.

Federal Tax Reform – In general, California R&TC does not conform to all of the changes under the TCJA. For adjustments due to the TCJA, see the specific line instructions for the following items:

Combat zone extended to Egypt’s Sinai Peninsula

Moving expenses and reimbursements

Limitation on deduction of business interest

Limitation on employer’s deduction for fringe benefit expenses

Limitation on wagering losses

Sexual harassment settlements

Global intangible low-taxed income (GILTI) under IRC Section 951A

Qualified equity grants

Expanded use of IRC Section 529 account funds

Living expenses for members of Congress

Limitation on state and local tax deduction

Mortgage and home equity indebtedness interest deduction

Limitation on charitable contribution deduction

College athletic seating rights

Casualty or theft loss(es)

Miscellaneous itemized deductions

Registered Domestic Partners (RDPs) – RDPs will compute their limitations based on the combined federal adjusted gross income (AGI) of each partner’s individual tax return filed with the Internal Revenue Service (IRS).

For column A, Part I and Part II, combine each line item of your federal amounts from each partner’s individual federal tax return. For more information on RDPs, get FTB Pub. 737, Tax Information for Registered Domestic Partners. The combined federal AGI used to compute limitations is different from the recalculated federal AGI used on Form 540, line 13. In situations where RDPs have no RDP adjustments, these amounts may be the same.

Military Personnel – Servicemembers domiciled outside of California, and their spouses/RDPs may exclude the servicemember’s military compensation from gross income when computing the tax rate on nonmilitary income. Requirements for military servicemembers domiciled in California remain unchanged. Military servicemembers domiciled in California must include their military pay in total income. In addition, they must include their military pay as California source income when stationed in California. However, military pay is not California source income when a servicemember is permanently stationed outside of California. Beginning 2009, the federal Military Spouses Residency Relief Act may affect the California income tax filing requirements for spouses of military personnel.

The federal Veterans Auto and Education Improvement Act (VAEIA) of 2022 was enacted on January 5, 2023, and made amendments to the federal Servicemembers Civil Relief Act (SCRA). California conforms to the following VAEIA provisions:

A spouse of a servicemember shall neither lose nor acquire a residence or domicile for purposes of taxation with respect to the person, personal property, or income of the spouse by reason of being absent or present in any tax jurisdiction of the United States solely to be with the servicemember in compliance with the servicemember's military orders.

For any taxable year of the marriage, a servicemember and the spouse of such servicemember may elect to use for purposes of taxation, regardless of the date on which the marriage of the servicemember and the spouse occurred, any of the following: The residence or domicile of the servicemember. The residence or domicile of the spouse. The permanent duty station of the servicemember.

For more information, get Form 540NR, California Nonresident or Part-Year Resident Income Tax Return, and FTB Pub. 1032, Tax Information for Military Personnel.

Single Member Limited Liability Company (SMLLC) – If you are a single member limited liability company, that is organized or doing business in California, or registered with the California Secretary of State (SOS), you are required to file Form 568, Limited Liability Company Return of Income, pay the annual tax and LLC Fee (if applicable), in addition to filing your tax return. Get Form 568, Limited Liability Company Tax Booklet, for more information.