In certain cases described below, California law is more generous than the Federal law

Subtract from Federal income

  • Income from business conducted partially in California: the nonresident’s California source business income is generally determined by an apportionment formula.
  • MACRS recovery period for nonresidential real property: while California conforms to a recovery period of 39 years for nonresidential properties, the California recovery of 31.5 years should be used from property placed in service between May 13, 1993 & December 31, 1997.

In certain cases described below, California law is not as generous as the Federal law

Add to Federal income

  • Depreciation
    • Section 179 elections (asset expense election): while federal law allows an expense election up to $500,000, the maximum deduction for Federal purposes, is reduced dollar for dollar once total personalty placed in service during the year exceeds $2,010,000, California limit the expense to $25,000 and the phase-out starts at $200,000.  Furthermore California does not conform to the election for off-the-shelves software’s and certain qualified real properties.
    • Bonus depreciation: Federal laws allow an additional 50% first year special depreciation for certain qualified property acquired on or after January 1st, 2007. (This special depreciation will be phased does starting in 2018). California does not conform to this Federal provision.
    • Leasehold improvements: While Federal law requires a 15-year recovery period for tax purposes, qualified leasehold improvements and qualified restaurant property must be recovered over 39 years for California business income tax.
  • Real estate professionals: Under Federal law, real estate activities conducted by persons in a real property business are not automatically treated as passive activities. These activities are still considered passive under California law.
  • Gain on the sale of qualified small business stock: While federal law allows the deferral and exclusion of the gain on sale of qualifying small business stock that was held for more than 5 years, California law does not.
  • Pension plan – small business tax credit: For new retirement plan expenses, Federal law allow an income tax credit for 50% of the first $1,000 in administration and education expenses. The federal deduction is reduced by the amount of the credit. California has no similar credit.

There are other differences that concern very specific situations that are not indicated in this post. Please note that this post relates to fiscal Years up to 2017. The Federal tax reform may have significant impacts.

I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.

Please do not hesitate to contact me should you have any question