Multistate and Federal/State Conformity Issues
Conformity basics
California conforms to many federal provisions but not all, and the conformity date matters. Candidates must understand that California adopts federal law as of a specified date, so later federal changes may not apply automatically. Know the major nonconformity items, such as the treatment of certain deductions and credits, and how California handles bonus depreciation and Section 179 limits.
Key concepts
Master apportionment and allocation for multistate businesses, including the single-sales-factor approach used by California. Understand residency rules and how California taxes residents on all income and nonresidents on California-source income. Know the rules on credit for taxes paid to other states.
Traps
Common traps: assuming full conformity, and forgetting that California uses a single sales factor for apportionment. Questions may test the credit for taxes paid to other states and whether it applies to all income types.
Rule of thumb
Check the conformity date before assuming a federal provision applies for California.
Worked example
A taxpayer claims a federal deduction that California has not conformed to. The deduction is added back on the California return, increasing California taxable income.