California Depreciation Methods: Section 179 Cap and Vehicle Limits

California depreciation methods diverge from federal rules in three ways that matter on every return: the state caps its Section 179 expense deduction at $25,000, refuses to recognize bonus depreciation, and requires C corporations to use recovery methods and useful lives that are entirely different from the federal Modified Accelerated Cost Recovery System (MACRS). Every California business that owns depreciable property has to keep a second schedule alongside the federal one, and the gap between the two is often large enough to reshape a year’s taxable income.

Why California Depreciation Differs From Federal

California does not automatically adopt every change Congress makes to the Internal Revenue Code. The legislature updates its conformity date through standalone bills, and in 2025 the Conformity Act (SB 711) moved the reference point to the IRC as of January 1, 2025, replacing the prior date of January 1, 2015. Even with the newer date, California specifically declines to adopt bonus depreciation under IRC Section 168(k) and imposes its own dollar limits on Section 179.¹ Those carve-outs are what force the parallel schedule.

Methods by Entity Type

The method you use depends on what kind of entity owns the asset. An asset that’s fully written off on the federal return may still carry a depreciable balance for California, and the mechanics differ between pass-through entities and C corporations.

Individuals, S Corporations, and Pass-Through Entities

Taxpayers filing under California’s personal income tax law can generally use MACRS to depreciate assets placed in service after 1986. S corporations follow the personal income tax depreciation rules, which gives them access to MACRS as well.² What California strips out are the accelerated components layered on top of MACRS at the federal level: bonus depreciation and the higher federal Section 179 limits. The recovery periods and conventions match; the first-year deduction is dramatically lower on the state side.

C Corporations

C corporations follow a different framework entirely. Revenue and Taxation Code Sections 24349 through 24354 establish the allowable methods, which include straight-line, declining balance (up to 200% for qualifying new personal property), and sum-of-the-years-digits.³ The maximum method available depends on the type of property, whether it was new or used when acquired, and when it was placed in service.

Useful life for corporate assets must be determined using the federal Asset Depreciation Range (ADR) system, which California adopted by regulation.⁴ ADR useful lives are often longer than MACRS recovery periods, so a C corporation’s California depreciation stretches over more years than the federal deduction for the same asset. The maximum methods available:

New personal property with a three-year life or longer: 200% declining balance
Used personal property with a three-year life or longer: 150% declining balance
New residential rental real estate: 200% declining balance
New commercial or industrial real estate: 150% declining balance
Used commercial or industrial real estate: straight-line only

An S corporation that previously operated as a C corporation cannot use MACRS for assets placed in service during the C corporation years. That transition requires a change in accounting method with FTB approval.²

Assets Placed in Service Before 1987

California never adopted the federal Accelerated Cost Recovery System (ACRS) that applied to assets placed in service between 1981 and 1986. Taxpayers still carrying pre-1987 assets must continue using whatever California-approved method they originally selected, typically straight-line, declining balance, or sum-of-the-years-digits.⁵ Those assets cannot be switched to MACRS retroactively.

California’s Section 179 Cap

Section 179 lets a business write off the full cost of qualifying equipment in the year of purchase rather than depreciating it over time. California allows the deduction but caps it far below the federal number. The state maximum is $25,000 per year, and it phases out dollar-for-dollar once total Section 179 property placed in service during the year exceeds $200,000.⁶ A business purchasing $225,000 or more in qualifying equipment in a single year gets zero California Section 179 benefit.

The federal Section 179 limit, by comparison, was $1,250,000 for 2025 with a phase-out threshold starting at $3,130,000 in total purchases. Both federal figures are indexed annually for inflation. California’s $25,000 and $200,000 figures are fixed in the Revenue and Taxation Code and have not changed in decades. The same limits apply to personal income tax filers and C corporations.³

A business that expenses $500,000 of equipment federally under Section 179 deducts only a fraction of that amount on the California return in year one. The remaining cost basis stays on the California depreciation schedule and gets recovered over the asset’s useful life, producing smaller deductions in future years that partially offset the initial shortfall.

Bonus Depreciation Is Not Available

Federal bonus depreciation under IRC Section 168(k) allows businesses to deduct a large percentage of a qualified asset’s cost in the first year. California has never adopted this provision, and SB 711’s 2025 conformity update explicitly continued the non-conformity.¹ The entire cost of the asset, less any California Section 179 deduction, must be recovered through standard depreciation methods on the state return.

The practical impact shows up most on expensive equipment. A business buying a $200,000 machine might deduct the full cost on its federal return in year one through a combination of Section 179 and bonus depreciation. On the California return, that same business deducts at most $25,000 under Section 179 and then depreciates the remaining $175,000 over the asset’s useful life. The resulting adjustment to California taxable income in year one can run into six figures for a single asset.

Passenger Vehicle Limits

Federal law under IRC Section 280F caps annual depreciation for passenger vehicles, with different limits depending on whether the vehicle qualifies for bonus depreciation. For vehicles placed in service in 2026, the first-year federal cap is $20,300 with bonus depreciation or $12,300 without it.⁷

Because California does not allow bonus depreciation, the first-year deduction for a passenger vehicle on the state return is effectively capped at the lower $12,300 figure. A business owner who claims the $20,300 federal first-year deduction has to add back the $8,000 difference on the California return. The second-year and later-year caps are the same regardless of bonus depreciation status, so the state and federal deductions realign after year one.

Basis Differences When You Sell

Different depreciation schedules mean different adjusted bases, and different bases mean different taxable gains or losses. Federal gain uses the federal adjusted basis (original cost minus all federal depreciation claimed), while California gain uses the California adjusted basis (original cost minus all California depreciation claimed).⁸ Because California’s slower depreciation leaves more basis in the asset, the California gain on sale is typically smaller than the federal gain.

This works in the taxpayer’s favor at disposition. The timing difference that increased California taxable income in earlier years reverses when the asset is sold, because the higher remaining basis reduces the gain. The FTB’s audit procedures confirm that basis differences between federal and state schedules directly affect the amount of capital gain or loss reported on the California return, including capital loss carryover calculations.⁹ Tracking both bases for every asset through its entire life is the only way to calculate the correct gain or loss.

Which Form Reports the Adjustment

The FTB uses different forms depending on the taxpayer. Individuals, partnerships, S corporations, and other pass-through entities report the gap between federal and California depreciation on Form FTB 3885A, Depreciation and Amortization Adjustments.⁶ The form computes California-allowed depreciation and compares it to the federal amount, and the difference flows to Schedule CA (540 or 540NR). If the federal and state amounts match for all assets, the form is unnecessary.

C corporations use Form FTB 3885, Corporation Depreciation and Amortization, which serves a similar function but follows the corporate depreciation framework under R&TC Sections 24349 through 24354.³ Fiduciaries and partnerships have their own variants (Forms 3885F and 3885P). The logic is the same across all of them: calculate what California allows, subtract what was claimed federally, report the adjustment.

When federal depreciation exceeds the California amount, the adjustment increases California taxable income. In later years, as California depreciation catches up on assets that were fully expensed federally, the adjustment reverses and reduces state taxable income. Businesses with large equipment purchases often see positive adjustments for several years before the reversal begins.

Penalties for Getting It Wrong

Miscalculating the depreciation adjustment can trigger accuracy-related penalties on both federal and state returns. California’s penalty under Revenue and Taxation Code Section 19164 generally mirrors the federal structure in IRC Section 6662, imposing an additional charge equal to 20% of the underpayment attributable to negligence or a substantial understatement of income tax.¹⁰ An understatement is substantial if it exceeds the greater of 10% of the tax due or $5,000 for individuals, with a separate threshold for corporations.¹¹

The most common depreciation mistakes are claiming bonus depreciation on the California return (it should never appear there), using MACRS recovery periods on a C corporation return instead of ADR useful lives, and failing to reduce the Section 179 deduction to the California limit. These errors are easy for the FTB to catch because they show up as unexplained differences between the federal and state returns. A clean, asset-by-asset schedule that tracks both federal and California depreciation from placement through disposition is the simplest protection.

1
Franchise Tax Board. Bill Analysis SB 711 – Conformity Act of 2025
2
Franchise Tax Board. 2022 California Schedule B (100S) S Corporation Depreciation and Amortization
3
Franchise Tax Board. 2025 Instructions for Form FTB 3885 Corporation Depreciation and Amortization
4
Legal Information Institute. California Code of Regulations Title 18 Section 24349(l) – Depreciation Based on Class Lives
5
Franchise Tax Board. FTB 3885F – Depreciation and Amortization
6
Franchise Tax Board. 2025 Instructions for Form FTB 3885A Depreciation and Amortization Adjustments
7
Internal Revenue Service. Rev Proc 2026-15
8
Internal Revenue Service. Topic No. 703 Basis of Assets
9
Franchise Tax Board. California Multistate Audit Technical Manual – Chapter 6000
10
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
11
Franchise Tax Board. Manual of Audit Procedures – Chapter 11 Penalties