California Tax Changes in 2025: What You Need to Know

Stephanie Peterson
Apr 22
3 min read

Updated: Apr 30

As we navigate through 2025, several significant tax changes have taken effect in California, impacting individuals, businesses, and specific industries. Here's an overview of the key updates:

1. State Income Tax Rates Remain Unchanged

California continues to implement a progressive income tax system with nine brackets ranging from 1% to 12.3%. Additionally, a 1% mental health services tax applies to taxable income exceeding $1 million, bringing the top marginal rate to 13.3%.

2. Adjustments to Corporate Tax Provisions

To address budget shortfalls, California has enacted temporary measures affecting corporate taxation:

Limitation on Tax Credits: Businesses are restricted from using tax credits to reduce their tax liability by more than $5 million annually.
Suspension of Net Operating Loss Deductions: Companies with taxable income of $1 million or more are temporarily barred from applying net operating loss deductions.

These provisions are projected to increase state revenues by approximately $5.5 billion in the 2025–26 fiscal year.

3. Changes to the Managed Care Organization (MCO) Tax

Following the approval of Proposition 35 in November 2024, the utilization of MCO tax revenues has been modified:

The amount of MCO tax revenue allocated to offset General Fund spending on Medi-Cal services has been reduced, with further decreases scheduled in subsequent years.

4. Sales and Use Tax Rate Modifications

Effective April 1, 2025, several cities and counties in California have implemented changes to their sales and use tax rates to fund local initiatives and service. View the current rates here: CDTFA

5. Enhanced Film and Television Tax Credit

To bolster the entertainment industry, California has increased the cap on its film and television tax credit from $330 million to $750 million for fiscal years 2025–26 through 2029–30 . This move aims to retain and attract productions within the state.

6. Shift to Single Sales Factor Apportionment for Financial Institutions

Beginning in tax year 2025, financial institutions in California are required to use a single sales factor apportionment method for state income tax purposes. This approach bases tax liability solely on sales within California, potentially increasing tax obligations for institutions with significant in-state revenues.

7. Tax Relief for Wildfire-Affected Taxpayers

In response to the devastating wildfires in early 2025, the IRS has granted tax relief to affected California residents:

Extended Deadlines: Taxpayers in designated disaster areas have until October 15, 2025, to file various federal tax returns and make payments originally due between January 7 and October 15, 2025.

These tax changes reflect California's ongoing efforts to address fiscal challenges, support key industries, and provide relief to residents impacted by unforeseen events. Staying informed about these developments is crucial for effective financial planning in 2025.

Are you looking for someone to manage your companies books and/or file your taxes? If so, contact me today; I would be happy to assist you! I am a CA Registered Tax Preparer and an Advanced Certified QuickBooks ProAdvisor. I specialize in working with clients who use QuickBooks Online—located in Murrieta, CA, and in Southern California and the greater Las Vegas, Nevada area.