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title: "California Section 179 $25,000 Cap: Rules & State Add-Backs (2026) | Sec179Rules.com"
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> **Canonical Source:** [https://sec179rules.com/guide-california-section-179-25k-cap-workarounds](https://sec179rules.com/guide-california-section-179-25k-cap-workarounds)
>
> *In-depth CPA guide on California*

# California Section 179 $25,000 Cap: Rules, State Add-Backs & Form FTB 3805P

A deep-dive CPA guide on California's statutory decoupling from federal Section 179, bonus depreciation disallowance, and Franchise Tax Board filing requirements.

### Executive Summary: The California Decoupling Trap

While federal tax law allows a **$1,250,000 Section 179 write-off** for tax year 2026, California is one of the strictest non-conforming states in the nation. Under **California Revenue & Taxation Code § 17201 and § 24356**, the state Section 179 deduction is capped at **$25,000** with a phase-out starting at $200,000. Furthermore, California completely disallows 100% federal bonus depreciation.

## 1. Federal vs. California Section 179 Comparison

| Provision | Federal (IRS) | California (FTB) |
| :--- | :--- | :--- |
| **Section 179 Deduction Cap** | $1,250,000 | $25,000 Maximum |
| **Phase-Out Threshold** | $3,130,000 | $200,000 (Phases out at $225k) |
| **Bonus Depreciation (IRC § 168k)** | 100% Conforming | 0% Disallowed (Full State Add-Back) |
| **Primary Filing Form** | IRS Form 4562 | Form FTB 3805P (Pass-Through) / FTB 3885 (Corp) |
| **Top Tax Rates (2026)** | 21% Corporate / 37% Individual | 8.84% Corporate / 13.3% Individual |

## 2. How the California State Add-Back Is Calculated

Because California disallows excess Section 179 and bonus depreciation in Year 1, your business must maintain **two separate depreciation schedules**: a Federal Schedule and a California Schedule.

### 📊 Worked Case Study: $100,000 Equipment Purchase in California

Assume a California manufacturing business purchases **$100,000** in industrial equipment (7-year MACRS): • **Federal Return (IRS Form 4562):** Claims full **$100,000 Section 179** write-off in Year 1 → Federal Basis becomes $0. • **California Return (Form FTB 3805P):** Can only claim **$25,000** under CA Rev. & Tax Code § 17201. • **Remaining California Basis ($100,000 - $25,000):** $75,000. • **California Standard MACRS Year 1 Deduction (14.29%):** $75,000 × 14.29% = $10,718. • **Total California Year 1 Deduction:** $25,000 + $10,718 = **$35,718**. • **California State Tax Add-Back Adjustment:** $100,000 (Federal) - $35,718 (State) = **+$64,282 added back to California taxable income!**

## 3. S-Corporation & LLC Member Level Limitations

In California, the $25,000 Section 179 limitation applies at **both the entity level AND the individual shareholder/partner level**. If an individual is an owner in multiple California LLCs or S-Corps that each claim $25,000 in Section 179, the total allowable Section 179 deduction passing through to the owner's California personal return (Form 540) is still capped at $25,000.

## 4. Workaround 1: California Manufacturing Partial Sales Tax Exemption (RTC § 6377.1)

While California restricts income tax depreciation, it provides an exceptional upfront cash subsidy through the **California Partial Sales and Use Tax Exemption (CA Rev. & Tax Code § 6377.1)**:

Qualifying manufacturers, biotechnologists, software fabricators, and R&D enterprises (NAICS codes 3111 to 3399 and 541711/541712) can reduce their sales tax rate by **3.9375%** at the point of purchase! • On a $500,000 CNC machine or automated assembly cell, this exemption delivers an **instant $19,687 cash savings at the dealership**, substantially cushioning the pain of California's $25,000 income tax cap. • Form CDTFA-230-M (Partial Exemption Certificate for Manufacturing and Research & Development Equipment) must be provided to the equipment vendor prior to delivery.

## 5. Workaround 2: Optimizing the AB 150 Pass-Through Entity (PTE) Elective Tax

California enacted **AB 150 (PTE Elective Tax)** to allow eligible pass-through entities (S-Corporations, Partnerships, and LLCs taxed as partnerships) to pay a **9.3% entity-level state tax** on qualified net income, providing an uncapped federal deduction that bypasses the $10,000 federal State and Local Tax (SALT) deduction cap:

#### Strategic Interaction with Section 179

Because California limits Section 179 to $25,000, the entity's California taxable income is higher than its federal taxable income. When the entity elects into AB 150, it pays the 9.3% tax on the *higher California income basis*, generating a larger federal deduction on Form 1120-S / Form 1065 Line 14, effectively funneling more tax savings back to the owners on their federal return!

## 6. Step-by-Step California Tax Return Reporting (FTB 3805P & FTB 3885)

To properly reconcile federal and California depreciation, follow this filing protocol:

- **For Individuals & LLCs:** Complete **Form FTB 3805P (Additional Taxes on Qualified Plans and Other Tax-Favored Accounts / Depreciation Reconciliations)**. Enter the federal Section 179 deduction claimed, subtract the California $25,000 limit, and transfer the difference as an addition to income on California Schedule CA (540) Part I Section B Line 3.
- **For C-Corporations & S-Corporations:** Complete **Form FTB 3885 (Corporation Depreciation and Amortization)**. Part I reconciles the Section 179 expense limitation ($25,000 cap), while Part II calculates the allowable state regular MACRS deduction over the asset's recovery life.
- **Dual Fixed Asset Registers:** Maintain separate tax depreciation ledger columns ("Federal Tax Book" vs. "California Tax Book") in your accounting software (e.g. QuickBooks, NetSuite, Sage Fixed Assets) to accurately track differing future-year depreciation allowances and adjusted tax basis upon ultimate sale.

### Calculate Your California Tax Savings & Add-Backs

Select California in our interactive tax engine to compute your exact federal deduction, state $25,000 cap adjustment, and net cash savings.

## Structured FAQ Summary (Schema.org Grounded)
- **Why is California Section 179 capped at $25,000?** California operates under a 'fixed-date' conformity statute (CA Rev. & Tax Code § 17201 and § 24356) that has not conformed to federal Section 179 expansion acts, permanently freezing state expensing at $25,000 with a $200,000 phase-out threshold.
- **Does California allow federal Bonus Depreciation?** No. California explicitly disallows 100% federal bonus depreciation claimed under IRC § 168(k). The full amount of federal bonus depreciation must be added back to California taxable income on Form FTB 3805P (for individuals/pass-throughs) or Form FTB 3885 (for corporations).
- **Which California tax form is required to report the depreciation adjustment?** Pass-through entities and individuals file Form FTB 3805P (Additional Depreciation and Amortization Information), while C-Corporations file Form FTB 3885 (Corporation Depreciation and Amortization) to reconcile federal Form 4562 with California basis.

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