The California Franchise Tax Board (FTB) recently finalized updated income tax regulations related to the sourcing of certain types of sales of other-than-tangible personal property income. Additionally, Gov. Gavin Newsom signed into law legislation updating the state’s Internal Revenue Code (IRC) conformity date. Together, these changes will affect how taxpayers determine California taxable income beginning with tax year 2025. 

Revised income tax regulations

The revised regulations codify enhanced guidance related to the sourcing of sales of other-than-tangible personal property for pass-through entities and corporations. Specifically, the regulations will impact how taxpayers source sales of services and income generated from intangible property. The regulations provide a revised sourcing methodology to determine where the benefit of a service is received. The revisions include updated examples of determining where a benefit is received using 1) the books and records of a taxpayer, 2) any other available information, and 3) reasonable approximation. Additionally, the regulations clarify the sourcing method to be used in relation to sales of services to the U.S. government and receipts from intangible property. The regulation provides several examples of “any other available information” within the regulation depending on the nature of the services rendered to the customer.

Beyond revisions to the existing sourcing rules, the regulations provide new guidance for sourcing income from asset management services and large volume professional services. 

Asset management services are defined as the direct or indirect provision of management distribution, or administration services to investor funds.

Large volume professional services are defined as services from management, legal, actuary, audit, consulting, accounting, etc., provided to over 250 customers.

The regulations generally require that asset managers source income from asset management services to the domicile of the investor or the beneficial owner of an investment. Large volume professional service providers will source sales of services to its customers’ billing addresses; however, revenues from a single customer constituting greater than 5% of the taxpayer’s total gross receipts may be subject to special rules and examples provided within the regulation.

The regulations will be effective for tax years beginning on and after Jan. 1, 2026.

Updated federal conformity date 

The California legislature recently passed legislation that was signed into law by Gov. Newsom on Oct. 1, 2025, amending the general conformity date to the IRC. The current conformity date is Jan. 1, 2015; the legislation updates that date to Jan. 1, 2025. This results in California generally conforming to major federal tax acts promulgated over the past decade, including the Tax Cuts and Jobs Act and the Coronavirus Aid, Relief, and Economic Security Act. Note, however, the bill does contain multiple provisions related to conformity to specific sections of the IRC where the general conformity rules will not apply. These deviations from the general conformity rule are numerous and do affect individual, pass-through, and corporate taxpayers.

What does CohnReznick think? 

Taxpayers in California should be mindful of the impact these changes may have on their income tax obligations. In particular, the IRC conformity legislation is retroactive to Jan. 1, 2025 and will impact the current tax year. The legislative and regulatory changes have the potential to materially affect their California income tax liabilities. As such, additional review and analysis may be necessary to apply these regulatory changes. Taxpayers are encouraged to consult with their tax advisors to determine the effect of the legislation on their own circumstances and to plan for any potential tax mitigation efforts.