OBBBA Tax Changes and What They Mean for California Businesses

If you have read that Congress restored 100% bonus depreciation, raised the estate tax exemption to $15 million, and made the individual tax rates permanent, all of that is accurate — for your federal return. The One Big Beautiful Bill Act (OBBBA), Public Law 119-21, was signed on July 4, 2025, and it is the most significant rewrite of the Internal Revenue Code since 2017. What most national coverage leaves out is the part that matters most to anyone filing in this state: California has not adopted any of it.

That gap is not a technicality. It is the reason a Temecula manufacturer can write off a $400,000 equipment purchase in full on Form 4562 and still owe California tax on nearly all of it. It is why the same transaction produces two completely different numbers depending on which return you are looking at. At The Law Office of Pietro Canestrelli, an LL.M. in Taxation and a background working matters from inside the federal tax system inform how we approach this split every day for clients across Riverside, San Diego, and San Bernardino Counties.

This page walks through what OBBBA actually changed, where California parts company with it, and the planning decisions that change as a result. If you want to talk through your own numbers, schedule a consultation with our California tax attorneys.

What OBBBA Changed at the Federal Level

OBBBA made permanent much of what was set to expire after 2025 under the Tax Cuts and Jobs Act, and added several new provisions of its own. The changes that most often affect our clients:

• Bonus depreciation restored to 100% and made permanent for qualifying property acquired and placed in service after January 19, 2025, reversing the phase-down that had dropped the rate to 40% for 2025.
• Section 179 expensing raised to $2.5 million, with the phaseout threshold moved to $4 million, for property placed in service after December 31, 2024.
• Domestic research expensing restored under new IRC Section 174A for tax years beginning after December 31, 2024, ending the five-year amortization requirement that had forced profitable-on-paper losses for R&D-heavy companies. Foreign research is still amortized over 15 years.
• Estate and gift tax exemption set at $15 million per person ($30 million for a married couple), effective January 1, 2026, permanent and indexed thereafter.
• Individual rate brackets made permanent at 10, 12, 22, 24, 32, 35, and 37 percent.
• SALT deduction cap raised to $40,000 for 2025 and $40,400 for 2026, phased down for higher incomes and reverting to $10,000 in 2030.
• New deductions for tips and qualifying overtime for tax years 2025 through 2028 — deductions, not exclusions, and still fully subject to payroll tax.
• Clean energy credits terminated on a staggered schedule, with the clean vehicle credits ending after September 30, 2025 and the residential credits after December 31, 2025.

A Note on the Bill That Did Not Pass

Many businesses spent 2024 planning around the Tax Relief for American Families and Workers Act, which passed the House in January 2024 and then died in the Senate. It never became law. Its child tax credit expansion, its retroactive Section 174 fix, and its 100% bonus depreciation extension were all separate proposals that were never enacted in that form. If your prior advisor built a position around that bill, the position needs to be re-examined against what OBBBA actually says.

Where California Parts Ways

California is a fixed-date conformity state. It adopts the Internal Revenue Code as it existed on a specific date, and updates that date only when the Legislature passes a conformity bill. In October 2025, Senate Bill 711 moved California’s conformity date to January 1, 2025 — three months before OBBBA was signed. The practical result is that none of the OBBBA changes reach your California return.

Depreciation: The Largest Single Gap

California has never adopted bonus depreciation under IRC Section 168(k), and OBBBA did not change that. Every dollar of federal bonus depreciation must be added back when computing California taxable income and then recovered over the asset’s normal recovery period.

Section 179 is worse than most business owners expect. Per the Franchise Tax Board’s Form 3885 instructions, California caps the Section 179 deduction at $25,000, with the phaseout beginning at $200,000 of property placed in service. Against a federal limit of $2.5 million and a $4 million threshold, that is a 100-to-1 difference. A business placing $300,000 of equipment in service gets no California Section 179 deduction at all — the phaseout has consumed it entirely.

What this looks like in practice: a Murrieta contractor buys $400,000 in equipment in 2026. Federally, Section 179 and bonus depreciation together can absorb the full amount in year one. On the California return, the deduction is limited to $25,000 — and because $400,000 exceeds the $225,000 point at which the cap fully phases out, even that is gone. The entire $400,000 is depreciated over five to seven years for state purposes. The federal tax bill drops sharply; the California bill does not move.

Two consequences follow. First, California estimated payments must be calculated on the state number, not the federal one — a mismatch here is one of the more common reasons clients come to us holding an underpayment notice. Second, you are now running two depreciation ledgers indefinitely, and the basis difference follows the asset until it is sold. Our page on Section 179 expensing and California’s limits covers the mechanics in detail.

Research Credits and Section 174A

The federal restoration of immediate domestic research expensing is real relief for software, biotech, and engineering firms. California did not adopt it. Research costs still follow California’s own rules, and the state’s research credit operates independently of the federal credit with its own computation. Companies claiming both need parallel documentation. See our research and development credit page for how we approach substantiation.

Tips, Overtime, and the QBI Deduction

The new federal deductions for tips and qualifying overtime do not exist in California. Tip and overtime income is taxed normally on the state return. The same is true of the Section 199A qualified business income deduction, which California has never adopted. Employers should also note that the federal deductions do not reduce FICA or state payroll obligations at all — an important point for restaurant and hospitality clients who have been told otherwise. Payroll classification questions of this kind often surface in EDD payroll tax audits.

Estate Tax

California imposes no state estate tax, so the $15 million federal exemption applies cleanly to California residents. The planning question is not conformity but property values — a Southern California estate can reach the threshold on real estate alone. We address this on our estate tax page.

One Place California Moved Independently

Senate Bill 132, signed in June 2025, extended California’s pass-through entity elective tax through 2030. The entity pays 9.3% at the entity level and owners take a credit. For tax years beginning in 2026, missing the June 15 prepayment no longer voids the election outright, but it reduces the owner’s credit by 12.5% of the shortfall. With the SALT cap now at $40,400 and phasing down at higher incomes, whether the PTE election still helps is a calculation, not an assumption — and it needs to be run before June 15, not at filing.

Planning Decisions That Change Because of the Split

1. Sequence your deductions. Claim Section 179 first up to California’s $25,000 (where it is not phased out), then apply bonus depreciation federally on the remaining basis. Taking bonus first wastes the state deduction entirely.
2. Recalculate California estimates separately. Federal savings do not translate. Build the state number from the state rules.
3. Time large purchases against the phaseout. A business near the $200,000 threshold may preserve a state deduction by splitting acquisitions across tax years.
4. Run the PTE election annually. The higher SALT cap changes the math for some owners and not others.
5. Track basis differences permanently. The federal-California basis gap surfaces on sale, and reconstructing it years later during an audit is expensive.

Southern California Context

The federal-state divergence hits certain local industries harder than others. Inland Empire logistics and trucking operations carry heavy equipment schedules, which makes the depreciation gap large in absolute dollars. San Diego biotech and defense contractors feel the Section 174A split most. Temecula Valley agriculture and wine businesses face both, plus seasonal labor questions that intersect with the tips and overtime provisions.

The Franchise Tax Board examines conformity adjustments as a category, and depreciation add-backs are a recurring examination issue. If your California return claims federal depreciation figures without the required add-back, that is the kind of discrepancy that generates a Notice of Proposed Assessment. Our FTB representation practice handles these from protest through the Office of Tax Appeals.

Frequently Asked Questions

Does California conform to OBBBA?

No. California’s conformity date is January 1, 2025, set by SB 711 in October 2025 — before OBBBA was signed on July 4, 2025. No OBBBA provision applies to a California return unless the Legislature passes a new conformity bill adopting it.

Can I take 100% bonus depreciation in California?

No. California has never allowed bonus depreciation under IRC Section 168(k). Any federal bonus depreciation must be added back on Schedule CA and recovered over the asset’s normal California recovery period.

What is California’s Section 179 limit?

$25,000, with the phaseout beginning at $200,000 of property placed in service and eliminating the deduction entirely at $225,000. The federal limit is $2.5 million with a $4 million threshold.

Do the new tip and overtime deductions apply on my California return?

No. They are federal deductions for tax years 2025 through 2028 only. California taxes tips and overtime as ordinary wage income, and neither deduction reduces payroll tax at any level.

Whatever happened to the Tax Relief for American Families and Workers Act of 2024?

It passed the House in January 2024 and was never enacted. Any planning built on its provisions should be reviewed against OBBBA, which addressed some of the same subjects on different terms.

Will California eventually adopt OBBBA?

Possibly in part. California has historically adopted selected federal provisions rather than conforming wholesale, and it has consistently declined to adopt bonus depreciation. Plan on the current rules and treat future conformity as upside.

Talk Through Your Numbers Before You File

The federal-California divergence is where we do some of our most valuable work, because it is precisely the area national tax firms handle poorly. A California business owner does not need a summary of what Congress passed — they need to know which line of their state return is going to look different, and what it costs.

Call our Temecula or San Diego office to discuss how OBBBA changes your federal position and what your California return still requires. Pietro Canestrelli holds an LL.M. in Taxation and represents businesses and individuals throughout Temecula, San Diego, Riverside, and San Bernardino. Schedule your consultation today.