California Does Not Follow New Tip, Overtime, Bonus Rules

Ask a generic search tool whether tips are still taxed, or whether you can write off a new machine in full this year, and the answer will usually stop at federal law. For California taxpayers, that answer is incomplete. California updated its tie-in to the Internal Revenue Code, but it did not adopt the One Big Beautiful Bill Act (OBBBA) provisions that most business owners and workers are hearing about. This Briefing explains where the two systems split and walks through a side-by-side example.

California's Conformity Date Is January 1, 2025

California does not automatically follow federal tax changes. It conforms to the Internal Revenue Code as of a fixed date, with its own modifications. According to the Franchise Tax Board, Senate Bill 711, the Conformity Act of 2025, moved that date from January 1, 2015 to January 1, 2025. The OBBBA was signed on July 4, 2025, after that date, so its changes do not carry over to California unless the Legislature acts separately.

As EY summarizes, California continues a selective, static approach and largely does not conform to the OBBBA provisions affecting compensation and benefits.

Tips and Overtime

Federal law now lets eligible workers deduct up to $25,000 of qualified tips, and up to $12,500 ($25,000 on a joint return) of qualified overtime premium pay, for 2025 through 2028, with phaseouts above $150,000 of modified adjusted gross income ($300,000 joint), as the IRS explains.

The FTB's Summary of Federal Income Tax Changes answers the California question directly: California does not conform to the deduction for tips or the deduction for overtime. It does conform to the new information reporting on Form W-2. Unless California enacts its own version, tips and overtime remain fully taxable on the California return.

Bonus Depreciation and Section 179

Federally, the OBBBA restored a permanent 100% additional first-year depreciation deduction for qualified property acquired after January 19, 2025, as described in IR-2026-06. For 2026, the Section 179 expensing limit is $2,560,000, reduced dollar for dollar once qualifying purchases exceed $4,090,000, under Rev. Proc. 2025-32.

California does not follow either change. The FTB states that California law specifically does not conform to bonus depreciation, and that it does not conform to the federal Section 179 dollar limits. Under the FTB 3885A instructions, the California Section 179 maximum is $25,000, reduced when the cost of Section 179 property placed in service during the year exceeds $200,000. Corporations follow separate California depreciation rules altogether.

A Side-by-Side Example

Consider two Los Angeles taxpayers in 2026. These are hypothetical figures for illustration.

Example 1: A restaurant server. Maria is single, earns $58,000 in W-2 wages, and has modified adjusted gross income well under $150,000. Her W-2 shows $14,000 of cash tips in Box 12 with code TP and an eligible tipped occupation code, plus $3,000 of FLSA overtime premium with code TT.

• Federal: Maria can deduct $14,000 of qualified tips and $3,000 of qualified overtime, reducing her federal taxable income by $17,000.
• California: Neither deduction is allowed. All $58,000 of wages, including the $17,000, stays in her California income.

Example 2: A contractor buying equipment. An LLC taxed as a partnership buys and places in service $200,000 of new 7-year equipment in 2026. It is the only equipment purchased that year.

• Federal: 100% bonus depreciation allows a $200,000 deduction in 2026.
• California: No bonus depreciation. The LLC can elect $25,000 of California Section 179 expensing (purchases do not exceed $200,000, so there is no reduction). The remaining $175,000 is depreciated under the regular 7-year schedule. Using the half-year convention rate of 14.29% from IRS Publication 946, that is about $25,008, for a first-year California deduction of roughly $50,008.
• Difference: About $150,000 more income is taxable in California in 2026. The gap reverses over later years as California depreciation continues and federal depreciation is already used up, so the LLC and its owners need to track separate federal and California asset bases.

If most of a year's purchases are placed in service in the last quarter, the mid-quarter convention can lower the California first-year amount further. That is one more reason to plan the timing of purchases.

Other Differences Employers Should Know

• Dependent care assistance. The federal exclusion rose to $7,500 for 2026. EY notes that California's exclusion remains $5,000.
• Health savings accounts. Employer and employee HSA contributions continue to be included in California wages.
• Qualified business income. California has never adopted the federal 20% deduction under Section 199A, and the FTB confirms it does not conform to the OBBBA changes.
• State and local taxes. California does not allow a deduction for state income taxes and did not adopt the higher federal SALT cap.

For a full year-end plan that accounts for these differences, see our 2026 year-end tax planning checklist, along with our Briefings on W-2 reporting for tips and overtime and placing equipment in service by December 31.

Key Takeaways

• California conforms to the Internal Revenue Code as of January 1, 2025, so the OBBBA changes enacted on July 4, 2025 do not apply unless California adopts them separately.
• California does not allow the federal deductions for qualified tips or qualified overtime.
• California does not allow bonus depreciation, and its Section 179 limit stays at $25,000 with a $200,000 phaseout threshold.
• Expect larger federal and California differences on 2026 returns, and keep separate depreciation records.

If you want your 2026 federal and California projections built side by side, schedule a consultation with SMB CPA Group. You can also contact us, learn about our custom scope of work, or review our pricing.

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