Generally, most adjustments to federal business income on the California tax return will be related to:
a. Differences in depreciation methods between California and federal
b. Differences in special credits between California and federal
c. Differences in accelerated write-offs between California and federal
d. All of the above
The correct answer and explanation is:
The correct answer is d. All of the above.
California has its own tax code, which differs in several respects from federal tax law. As a result, adjustments are often required when reconciling federal business income with income reported on the California tax return. The primary differences that lead to these adjustments are:
- Differences in depreciation methods between California and federal: California uses a different depreciation schedule for certain assets, most notably in terms of the timing and method for depreciation. For example, California does not conform to the federal Accelerated Cost Recovery System (ACRS) or Modified Accelerated Cost Recovery System (MACRS) for some property. As a result, businesses may need to adjust depreciation expenses reported on their federal return to reflect California’s rules, resulting in differences in taxable income.
- Differences in special credits between California and federal: California offers various tax credits that do not align with federal credits. For instance, California provides its own research and development credits, which might not be available at the federal level. Other credits such as the California Competes Tax Credit are unique to the state and require separate calculations and reporting, leading to adjustments in income when transitioning from federal to state taxation.
- Differences in accelerated write-offs between California and federal: Both federal and California tax codes allow for accelerated write-offs, but they may differ significantly in their approach. For example, California does not conform to the federal Section 179 expensing rules, which allow businesses to deduct the full cost of qualifying property in the year of purchase. As a result, businesses in California might need to adjust their income to account for these differences in write-off provisions.
These factors combined typically result in businesses needing to make multiple adjustments to their federal income when filing the California state return.