With the enactment of the Tax Cuts and Jobs Act (TCJA), nonconformity issues are raised to a whole new level. As we’ve said numerous times before, California does not conform to the vast majority of the changes enacted by the TCJA.
Here are a few of the changes that could have the greatest negative impact on the California return or could easily be missed, causing clients to overpay their California taxes.
- Property taxes: Itemized deduction for state and local taxes limited to $10,000 for federal purposes but not for California.
- Mortgage interest: The amount of deductible mortgage interest is limited to $750,000 of acquisition indebtedness on the federal return, but this limitation does not apply to the California return.
- Moving expenses: This deduction was repealed for federal purposes, but California taxpayers may deduct the moving expense or exclude the reimbursement.
- §529 plans: Federal law allows tax-free distributions to pay for K-12 expenses at private or religious schools, but for California these distributions are includable and subject to the 2.5% penalty.
- Charitable contribution limits: Federal law increases the individual charitable contribution limit to 60% of federal AGI, but it remains 50% for California.
- Miscellaneous itemized deductions subject to 2% floor: Repealed for federal purposes, but still allowed for California purposes.
- Casualty and theft losses: federal law repeals the individual casualty loss except for those taxpayers in Presidentially declared disaster areas; California still allows a casualty loss deduction.
- Entertainment expenses: Repealed for federal purposes but still allowed for California purposes for both businesses and as an employee business expense.
- Technical terminations: Federal law no longer requires a partnership to terminate after a greater than 50% change in ownership, but California still requires two short-period returns.
- Small business accounting methods: Federal law provides a uniform small business exemption from various accounting method requirements; California nonconformity means separate books and records for state purposes.
Nonconformity issues are clearly laid out in the 2019 edition of The Big Blue Answer Book™ and is now shipping. Click here for more information.