The California Section 179 deduction is capped at $25,000 per tax year, with the deduction phasing out dollar-for-dollar once qualifying property placed in service exceeds $200,000 and disappearing entirely at $225,000. Those figures come from California Revenue and Taxation Code Section 17255, which replaces the federal Section 179 dollar limits with much lower state-specific ones.1California Legislative Information. California Revenue and Taxation Code 17255 The federal limit for 2026, by comparison, is $2,560,000 with a phase-out that begins at $4,090,000. That gap is the single most important fact for any California business planning a large equipment purchase.
How the $25,000 Cap and $200,000 Phase-Out Work
The $25,000 maximum is the absolute ceiling, no matter how large the federal deduction. Once total qualifying property placed in service during the year passes $200,000, the $25,000 maximum shrinks by one dollar for every dollar over the threshold. A business placing $210,000 in service loses $10,000 of the deduction, leaving $15,000. At $225,000, the deduction is gone.
The practical result: a business buying $300,000 in equipment can expense the whole amount federally but gets no California Section 179 benefit at all. Everything above the ceiling must be depreciated on the California return using standard MACRS recovery periods, and that separate schedule follows the asset until it is fully depreciated or disposed of.
Who Can Claim It
Only taxpayers with an active trade or business in California qualify. Passive investment activity does not count, and an owner’s share of Section 179 expense from a business they do not actively manage may be limited under the passive activity loss rules.2Franchise Tax Board. 2025 Instructions for Form FTB 3801 Passive Activity Loss Limitations
California also imposes an active business income ceiling. The total Section 179 deduction cannot exceed net income from all active trades or businesses the taxpayer conducts during the year, and it cannot create or increase a net loss. Any amount you cannot use because of this limit carries forward to future years and becomes available when active business income is large enough to absorb it.3State of California Franchise Tax Board. 2025 Instructions for Form FTB 3885 Corporation Depreciation and Amortization
What Property Qualifies
California generally follows the federal definition. Qualifying assets are tangible personal property acquired by purchase for use in the active conduct of a trade or business: machinery, equipment, furniture, off-the-shelf computer software. The property must be placed in service during the tax year the deduction is claimed.4Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets
Several common acquisitions are excluded. Property received as a gift, inherited, or purchased from a related party does not qualify. The related-party rules reach spouses, ancestors, lineal descendants, and commonly controlled businesses, which is broad enough to disqualify most transfers within a family or between entities owned by the same people.
Real Property Improvements Do Not Qualify in California
Federally, businesses can expense qualified improvements to the interior of a nonresidential building, plus roofing, HVAC, fire protection, and security systems. California never adopted that expansion. Those costs must be depreciated over their full recovery period on the California return.5Franchise Tax Board (FTB). Bill Analysis, SB 711 Conformity Act of 2025
Vehicles
Business vehicles can qualify, but the $25,000 annual cap is almost always the binding limit. The higher federal figures for heavy SUVs and the luxury-auto rules do not raise the California ceiling, because the state total across all Section 179 property tops out at $25,000. Business use must exceed 50%, and if it drops to 50% or below during the recovery period, the taxpayer must recapture the deduction as ordinary income in the year business use falls.
Making the Election on the California Return
The form depends on entity type. Corporations, including LLCs taxed as corporations, use FTB Form 3885, Corporation Depreciation and Amortization, and make the election in Part I.3State of California Franchise Tax Board. 2025 Instructions for Form FTB 3885 Corporation Depreciation and Amortization Individuals and sole proprietors use FTB Form 3885A, Depreciation and Amortization Adjustments, which includes a worksheet for the California-specific Section 179 calculation.6Franchise Tax Board. 2025 Instructions for Form FTB 3885A Depreciation and Amortization Adjustments
The election must appear on a timely filed California return, including extensions. You can make different Section 179 elections for California and federal purposes, and given the size of the gap, most businesses do exactly that. A taxpayer expensing $500,000 federally might elect only $25,000 for California and depreciate the remaining $475,000 over its normal recovery period on the state return.
Once made, the election is irrevocable without the Franchise Tax Board’s consent. Choose which assets to apply the deduction to with care, especially when total qualifying property is close to the $200,000 investment ceiling.
Pass-Through Entities
When an S corporation or partnership claims a California Section 179 deduction, the expense passes through to the owners on their Schedule K-1. For S corporations the amount appears on Line 11 of the California Schedule K-1 (100S), with any federal-state depreciation difference shown in column (c).7Franchise Tax Board. Shareholder’s Instructions for Schedule K-1 (100S)
Each owner then applies the Section 179 limits at the individual level. The $25,000 maximum and $200,000 investment ceiling apply to the taxpayer, not the entity. A shareholder receiving Section 179 pass-throughs from multiple businesses still cannot exceed $25,000 total, and the active business income limit applies to that shareholder’s own income from active trades or businesses.
Bonus Depreciation Is Also Not Allowed
Separate from Section 179, California does not conform to federal bonus depreciation under IRC Section 168(k). The 2025 Conformity Act, SB 711, again declined to adopt the TCJA modifications, continuing the state’s longstanding non-conformity.5Franchise Tax Board (FTB). Bill Analysis, SB 711 Conformity Act of 2025 So an asset that gets a full first-year write-off federally through bonus depreciation still has to be depreciated under standard MACRS on the California return. The adjustment is reported on Form FTB 3885A or FTB 3885 and flows to Schedule CA (540) for individuals or to the corporate return.8Franchise Tax Board. 2025 Instructions for Schedule CA (540)
Living With the Federal-State Depreciation Gap
Because California’s limits are so much lower, most businesses end up carrying two depreciation schedules for years after a large purchase. The federal schedule reflects the accelerated write-off. The California schedule spreads the cost over the asset’s full recovery period. Each year, the difference produces an adjustment on the California return, often adding income back in early years and producing a deduction in later years as California depreciation catches up.
Take a business that expenses $250,000 of equipment federally in one shot. On the California return, Section 179 is $0 because the investment ceiling is exceeded, and standard depreciation begins. Over the following five to seven years, the California deductions gradually offset the earlier difference. The timing mismatch matters for cash flow and estimated tax payments during that stretch.
Keep accurate records of both federal and California adjusted basis for every asset with different treatment. The stakes rise on disposition: an asset fully expensed federally has zero remaining federal basis, but may still have substantial undepreciated basis for California, producing a smaller California gain on sale. Errors in tracking those parallel schedules compound over the life of the asset.