Top 10 Things to Know About Filing Form 540 for 2025 (California Returns)

Important Updates for Creators, Online Sellers, Medical Professionals & High-Income Taxpayers

With filing season approaching, taxpayers and businesses across California are facing one of the most complicated years yet. Between the OB-BBA (“One Big Beautiful Bill Act”), California’s Big Conformity Bill, and the Los Angeles wildfire disaster postponements, California Form 540 rules for 2025 come with major changes.

At Velin & Associates, Inc., we work with a wide range of clients — YouTubers, TikTok creators, Shopify sellers, Amazon businesses, doctors, dentists, filmmakers, and high net worth individuals — and many of them have already begun asking how these new rules will affect their 2025 California return.

Below is a friendly, practical guide to the Top 10 Filing Changes You Must Know Before Filing Form 540 in 2025, along with examples based on real scenarios we see at our firm.

Los Angeles Wildfire Relief Must Be Noted on the 2025 Return

2025 estimated tax payments (Q1, Q2, Q3) were postponed until October 15, 2025 for affected LA County taxpayers.
However, if you do not indicate “LA County Wildfires” on top of your Form 540, California’s system may automatically send underpayment penalty notices.

Example (Content Creator / YouTuber):
A YouTuber who lost filming equipment during the wildfire assumed the IRS and FTB would “know automatically.” They didn’t.
Had they filed without the wildfire notation, the system would flag unpaid estimated taxes and issue a penalty notice.
This is a common oversight among CPA for Creators and CPA for YouTubers clients.

Alimony Remains Deductible on California Returns Until 2026

California still allows alimony deductions on 2025 returns.
Federal rules changed years ago — but California’s conformity only starts for divorce agreements signed after 2025.

Example (Dental Practice Client):
A dentist paying $1,500/month in alimony thought the deduction no longer applied.
Because their agreement was signed in 2022, the deduction still applies on the California return — saving them thousands.

California’s Wildfire Settlement Exclusion May Be Larger Than the Federal Exclusion

Key difference:
✔ California allows the exclusion for business AND personal losses
✘ Federal exclusion applies only to personal losses

California also does not limit the exclusion when losses are reimbursed by insurance.

Example (Amazon Business Owner):
An Amazon FBA seller received both insurance reimbursements and a settlement for warehouse inventory lost in the fires.
Under federal rules: Only personal loss amounts may be excluded.
Under California rules: The full business settlement may be excluded.
This makes a major difference for CPA for Amazon Business clients.

Business Interest Expense Limitation (IRC 163(j)) Applies to Individuals — But Not Corporations

Due to a drafting error, California unintentionally conformed to this federal limitation for individual taxpayers, including:

• Sole proprietors
• Single-member LLCs
• Partners in partnerships

Legislators expect to fix this in 2026.
Until then, affected taxpayers may want to extend their 2025 return.

Example (Shopify Store Owner):
A Shopify seller with large equipment financing costs may unexpectedly face a limitation on deducting business interest.
We often recommend extending to wait for the expected legislative correction.

New $20,000 Military Retirement Exclusion (California-Only)

Certain retired service members may exclude up to $20,000 in uniformed services retirement pay — only on the California return — if their federal AGI falls below the threshold.
Also applies to survivor benefit plan annuities.

Example (High Net Worth Client Supporting Retired Parent):
A high-net-worth tech entrepreneur supporting a retired Navy parent did not realize the parent could exclude up to $20,000 on their CA return — but still pay full tax federally.

California Allows Personal Casualty Losses Even for Non-Disaster Events (If Itemized)

Rules differ dramatically from federal law:
✔ California: Non-disaster victims can deduct casualty losses (with 10% AGI + $100 limits).
✔ Federal: Only disaster victims may claim losses.

Example (Medical Practice):
A medical office vandalized during a break-in (not a federal disaster) may qualify for a California deduction — but not a federal one.
This matters for CPA for Medical Practice and CPA for Doctors clients with equipment losses.

Section 529 K–12 Tuition Withdrawals Remain Taxable in California

Withdrawals after July 4, 2025 used for:

• K-12 tuition
• Credential programs

→ Taxable in California
→ Subject to a 2.5% penalty
Even though they are tax-free federally.

Example (TikTok Creator with Children):
A TikTok creator used their 529 plan to pay for a private school tuition, believing it was tax-free.
Federally: Correct.
California: Taxable + penalized.
These mismatches create surprise tax bills for CPA for TikTokers clients.

California Allows Larger Mortgage Interest Deductions Than Federal Law

California still allows:

• Interest on $1,000,000 of acquisition debt
• Interest on $100,000 of home equity debt (even if not used for improvements)

Federal caps are lower and stricter.

Example (High Net Worth Individual):
A high-income client with a $1.2M mortgage thought they had lost the deduction.
Federal: Limited.
California: Full state deduction.

Charitable Contribution Limits Differ (50% CA vs. 60% Federal)

California caps the charitable deduction at 50% of AGI, even though federal law allows up to 60%.

Example (Filmmaker Supporting a Nonprofit):
A filmmaker donating to an arts foundation could deduct 60% federally but only 50% in California.
This is a common finding during year-end planning for CPA for Filmmakers clients.

California Does Not Conform to Major TCJA Business Provisions

California continues to reject federal rules such as:
✘ 100% bonus depreciation
✘ Higher §179 expensing limits
✘ Foreign research amortization
✘ Increased business meal deductions
✘ Increased luxury auto limits

Example (Online Commerce Client):
An online seller wrote off an entire vehicle purchase federally using 100% bonus depreciation — but California only allows a small fraction of this deduction.
A common issue for CPA for Online Commerce and CPA for Shopify Store clients.

What This Means for Taxpayers in 2025

California rules have drifted far from federal rules.
For many clients — especially creators, online sellers, medical practices, and high net worth individuals — this means:

✔ State tax may differ significantly from federal tax
✔ Deductions may be allowed on one return but disallowed on the other
✔ Disaster rules can eliminate penalties — but only if noted correctly
✔ Extensions may be necessary for some taxpayers
✔ Careful documentation matters more than ever

Need Help Preparing Your 2025 California Return?

Velin & Associates, Inc. specializes in:

• CPA for YouTubers
• CPA for Shopify Store Owners
• CPA for Online Commerce
• CPA for Creators
• CPA for Filmmakers
• CPA for Amazon Business
• CPA for Dental Practice
• CPA for Doctors & Medical Practices
• CPA for High Net Worth Individuals

Get ahead of filing season — the earlier you prepare, the more you save. For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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