California Supplemental Guidelines to California Adjustments

Supplemental Guidelines to California Adjustments
FTB Publication 1001 Supplemental Guidelines to California Adjustments
FTB Publication

1001

2023
Supplemental Guidelines to
California Adjustments

Table of Contents
What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purpose  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise Tax Board Privacy Notice on Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3
3
5
5

Income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Total Amount from Federal Form(s) W-2, Box 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Medicaid Waiver Payments Not Reported on Federal Form(s) W-2  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Other Earned Income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Nontaxable Combat Pay Election  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Taxable Interest Income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Dividend Income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
IRA Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Pensions and Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Health Savings Account (HSA)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Social Security Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Capital Gains or Losses  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Additional Income
Taxable Refunds, Credits, or Offsets of State and Local Income Taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Alimony Received  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Business Income or (Loss) – Depreciation, Amortization, and Property Expensing  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Business Income or (Loss) – Adjustments to Basis or Business Deductions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Gains or Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, etc  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Unemployment Compensation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Income/Loss  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Adjustments to Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Itemized Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

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State of California — Franchise Tax Board	

FTB Pub.1001

Supplemental Guidelines to California Adjustments
What’s New
Federal Veterans Auto and Education
Improvement Act (VAEIA) of 2022 – The
VAEIA was enacted on January 5, 2023,
and made amendments to the federal
Servicemembers Civil Relief Act (SCRA).
California conforms to the following VAEIA
provisions:
•	 A spouse of a servicemember shall neither
lose nor acquire a residence or domicile
for purposes of taxation with respect to
the person, personal property, or income
of the spouse by reason of being absent or
present in any tax jurisdiction of the United
States solely to be with the servicemember
in compliance with the servicemember’s
military orders.
•	 For any taxable year of the marriage,
a servicemember and the spouse of
such servicemember may elect to use
for purposes of taxation, regardless of
the date on which the marriage of the
servicemember and the spouse occurred,
any of the following:
○	 The residence or domicile of the
servicemember.
○	 The residence or domicile of the
spouse.
○	 The permanent duty station of the
servicemember.
For more information, get FTB Pub. 1032, Tax
Information for Military Personnel.
Federal Consolidated Appropriations Act
(CAA), 2023 – The CAA, 2023, was enacted
on December 29, 2022, and it includes the
federal Setting Every Community Up for
Retirement Enhancement (SECURE) 2.0 Act
of 2022. In general, California Revenue
and Taxation Code (R&TC) conforms to the
changes to the retirement provisions under
the SECURE 2.0 Act. California law does not
conform to the federal changes that disallow
a deduction for charitable conservation
easement contributions when the amount
of the contribution exceeds 2.5 times the
sum of each partner’s relevant basis in the
partnership. For more information on the
allowance of the deduction for charitable
conservation easement contributions
for California income tax purposes, get
FTB Notice 2023-02.
For more general information, refer to the
federal act and the California R&TC. Also,
see instructions in this publication and get
Schedule CA (540), California Adjustments –
Residents, or Schedule CA (540NR), California
Adjustments – Nonresidents or Part-Year
Residents.
California Microbusiness COVID-19 Relief
Grant – The gross income exclusion for
the California Microbusiness COVID-19
Relief Grant is extended until taxable years
beginning before January 1, 2025. For
more information, see General Information
and instructions in this publication, get
Schedule CA (540) or Schedule CA (540NR),
and see R&TC Sections 17158.1 and 24311.

California Hope, Opportunity, Perseverance,
and Empowerment (HOPE) for Children Trust
Account Program – The California HOPE
for Children Trust Account Act created the
California HOPE for Children Trust Account
Program for the purpose of providing an
eligible child with a HOPE trust account.
For taxable years beginning on or after
January 1, 2023, California law allows an
exclusion from gross income for any funds
deposited, any investment returns accrued,
and any accrued interest in a HOPE trust
account and for any funds from a HOPE trust
account that is withdrawn or transferred
by an eligible youth. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR),
and see R&TC Section 17141.5.
Interagency Council on Homelessness
Payment Exclusion – For taxable years
beginning on or after January 1, 2023,
California law allows an exclusion from gross
income for payments received pursuant to
the California Welfare and Institutions Code
Section 8257 by members of the Interagency
Council on Homelessness, its advisory
committee, or its working groups who are or
have been homeless. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR),
and see R&TC Section 17131.13.
Kincade Wildfire Exclusion – For taxable
years beginning on or after January 1, 2020,
and before January 1, 2028, California law
allows a qualified taxpayer an exclusion
from gross income for any qualified amount
received in a settlement from Pacific Gas and
Electric (PG&E) Company or its subsidiary
relating to the 2019 Kincade Fire. If any
qualified amount received from a settlement
was included as income for federal purposes,
exclude that amount for California purposes.
If a qualified taxpayer included income
for a qualified amount received from this
settlement in a prior taxable year, the taxpayer
can file an amended tax return for that year
within the normal statute of limitations.
For more information, see instructions in
this publication, get Schedule CA (540)
or Schedule CA (540NR), and see R&TC
Sections 17139.2 and 24309.6.
Zogg Wildfire Exclusion – For taxable years
beginning on or after January 1, 2020, and
before January 1, 2028, California law allows
a qualified taxpayer an exclusion from gross
income for any qualified amount received
in a settlement from PG&E Company or
its subsidiary relating to the 2020 Zogg
Fire. If any qualified amount received from
a settlement was included as income for
federal purposes, exclude that amount for
California purposes. If a qualified taxpayer
included income for a qualified amount
received from this settlement in a prior
taxable year, the taxpayer can file an amended
tax return for that year within the normal
statute of limitations. For more information,
see instructions in this publication, get

Schedule CA (540) or Schedule CA (540NR),
and see R&TC Sections 17139.3 and 24309.7.
Discharge of Student Fees – For taxable
years beginning on or after January 1, 2022,
and before January 1, 2027, California law
allows an exclusion from gross income for
any amount of unpaid fees due or owed by
a student to a community college that was
discharged pursuant to California Education
Code Section 32527. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR),
and see R&TC Section 17131.21.
Guaranteed Income Pilot Program Payment
Exclusion – Beginning on June 30, 2022,
and before July 1, 2026, California law allows
an exclusion from gross income for any
payments received by an individual from a
guaranteed income pilot program or project
that receives a grant pursuant to California
Welfare and Institution Code Section 18997.
For more information, see instructions in
this publication and get Schedule CA (540)
or Schedule CA (540NR), and see R&TC
Section 17131.12.

General Information
In general, for taxable years beginning on or
after January 1, 2015, California law conforms
to the Internal Revenue Code (IRC) as of
January 1, 2015. However, there are continuing
differences between California and federal
law. When California conforms to federal
tax law changes, we do not always adopt
all of the changes made at the federal level.
For more information, go to ftb.ca.gov and
search for conformity. Additional information
can be found in the instructions for California
Schedule CA (540) or Schedule CA (540NR),
and the Business Entity tax booklets.
The instructions provided with California
tax forms are a summary of California tax
law and are only intended to aid taxpayers
in preparing their state income tax returns.
We include information that is most useful
to the greatest number of taxpayers in the
limited space available. It is not possible to
include all requirements of the R&TC in the
instructions. Taxpayers should not consider
the instructions as authoritative law.
Conformity
For updates regarding federal acts, go to
ftb.ca.gov and search for conformity.
Federal Acts – In general, the R&TC does
not conform to the changes under the
following federal acts. California taxpayers
continue to follow the IRC as of the
specified date of January 1, 2015, with
modifications. For specific adjustments due
to the following acts, see Schedule CA (540)
or Schedule CA (540NR) specific line
instructions:
•	 American Rescue Plan Act (ARPA) of 2021
(enacted on March 11, 2021)
•	 Consolidated Appropriations Act (CAA),
2021 (enacted on December 27, 2020)
FTB Pub. 1001  2023  Page 3

•	 Setting Every Community Up for
Retirement Enhancement (SECURE) Act
(enacted on December 20, 2019)
•	 Tax Cuts and Jobs Act (TCJA) (enacted on
December 22, 2017)
Small Business and Nonprofit COVID-19
Supplemental Paid Sick Leave Relief
Grant – For taxable years beginning on or after
January 1, 2021, and before January 1, 2030,
California law allows an exclusion from gross
income for grant allocations received by a
taxpayer pursuant to the California Small
Business and Nonprofit COVID-19 Supplemental
Paid Sick Leave Relief Grant Program that
is established by Section 12100.975 of
the Government Code. If any amount was
included as income for federal purposes,
exclude that amount for California purposes.
For more information, see instructions in
this publication and get Schedule CA (540)
or Schedule CA (540NR), and see R&TC
Sections 17158 and 24312.
Turf Replacement Water Conservation
Program – For taxable years beginning
on or after January 1, 2022, and before
January 1, 2027, California law allows
an exclusion from gross income for any
amount received as a rebate, voucher, or
other financial incentive issued by a public
water system, as defined, local government,
or state agency for participation in a turf
replacement water conservation program.
For more information, see instructions in
this publication and get Schedule CA (540)
or Schedule CA (540NR), and see R&TC
Sections 17138.2 and 24308.9.
Fire Victims Trust Exclusion – For taxable
years beginning before January 1, 2028,
California law allows a qualified taxpayer
an exclusion from gross income for any
amount received from the Fire Victims Trust,
established pursuant to the order of the United
States Bankruptcy Court for the Northern
District of California dated June 20, 2020, case
number 19-30088, docket number 8053. If any
amount was included as income for federal
purposes, exclude that amount for California
purposes. If a qualified taxpayer included
income for an amount received from the
Fire Victims Trust in a prior taxable year, the
taxpayer can file an amended tax return for that
year. If the normal statute of limitations has
expired, the taxpayer must have filed a claim
by September 29, 2023. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR),
and see R&TC Sections 17138.5 and 24309.3.
Thomas and Woolsey Wildfires
Exclusion – For taxable years beginning
before January 1, 2027, California law allows
a qualified taxpayer an exclusion from gross
income for any amount received in a settlement
from Southern California Edison for claims
relating to the 2017 Thomas Fire or the 2018
Woolsey Fire. If any amount was included
as income for federal purposes, exclude that
amount for California purposes. If a qualified
taxpayer included income for an amount
received from these settlements in a prior
taxable year, the taxpayer can file an amended
tax return for that year. If the normal statute
of limitations has expired, the taxpayer must
Page 4  FTB Pub. 1001  2023

have filed a claim by September 29, 2023.
For more information, see instructions in
this publication and get Schedule CA (540)
or Schedule CA (540NR), and see R&TC
Sections 17138.6 and 24309.1.
Reporting Requirements –Taxpayers may
need to file form FTB 4197, Information
on Tax Expenditure Items, with the tax
return to report tax expenditure items as
part of the Franchise Tax Board’s (FTB)
annual reporting requirements under R&TC
Section 41. To determine if you have an R&TC
Section 41 reporting requirement, see the
R&TC Section 41 Reporting Requirements
section in 540, Personal Income Tax Booklet,
or 540NR, Nonresident or Part-Year Resident
Booklet, or get form FTB 4197.
Expanded Definition of Qualified Higher
Education Expenses – For taxable years
beginning on or after January 1, 2021,
California law conforms to the expanded
definition of qualified higher education
expenses associated with participation in
a registered apprenticeship program and
payment on the principal or interest of a
qualified education loan under the federal
Further Consolidated Appropriations Act, 2020.
Shuttered Venue Operator Grant – For
taxable years beginning on or after
January 1, 2019, California law allows an
exclusion from gross income for amounts
awarded as a shuttered venue operator grant
under the CAA, 2021. The CAA, 2021, allows
deductions for eligible expenses paid for with
grant amounts. California law conforms to
this federal provision, with modifications. For
California purposes, these deductions do not
apply to an ineligible entity. “Ineligible entity”
means a taxpayer that is either a publiclytraded company or does not meet the 25%
reduction from gross receipts requirements
under Section 311 of Division N of the CAA,
2021. For more information, see instructions
in this publication and get Schedule CA (540)
or Schedule CA (540NR).
Moving Expense Deduction – For taxable
years beginning on or after January 1, 2021,
taxpayers should file California form FTB 3913,
Moving Expense Deduction, to claim moving
expense deductions. Attach the completed
form FTB 3913 to Form 540, California
Resident Income Tax Return, or Form 540NR,
California Nonresident or Part-Year Resident
Income Tax Return. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR),
and form FTB 3913.
Paycheck Protection Program (PPP) Loans
Forgiveness – For taxable years beginning on
or after January 1, 2019, California law allows
an exclusion from gross income for covered
loan amounts forgiven under the federal
Coronavirus Aid, Relief, and Economic Security
(CARES) Act, Paycheck Protection Program
and Health Care Enhancement Act, Paycheck
Protection Program Flexibility Act of 2020, the
CAA, 2021, or the PPP Extension Act of 2021.
Also, the ARPA expands PPP eligibility
to include “additional covered nonprofit
entities” which includes certain Code 501(c)
nonprofit organizations and Internet-only
news publishers and Internet-only periodical

publishers. California law does not conform to
this expansion of PPP eligibility.
The CAA, 2021, allows deductions for eligible
expenses paid for with covered loan amounts.
California law conforms to this federal
provision, with modifications. For California
purposes, these deductions do not apply to
an ineligible entity. “Ineligible entity” means
a taxpayer that is either a publicly-traded
company or does not meet the 25% reduction
from gross receipts requirements under
Section 311 of Division N of the CAA, 2021.
For more information, see instructions in this
publication and get Schedule CA (540) or
Schedule CA (540NR), or go to ftb.ca.gov and
search for AB 80.
Small Business COVID-19 Relief Grant
Program – For taxable years beginning
on or after January 1, 2020, and before
January 1, 2030, California law allows an
exclusion from gross income for grant
allocations received by a taxpayer pursuant
to the COVID-19 Relief Grant under Executive
Order No. E 20/21-182 and the California
Small Business COVID-19 Relief Grant
Program established by Section 12100.83 of
the Government Code. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR).
Income Exclusion for Rent Forgiveness –
For taxable years beginning on or after
January 1, 2020, and before January 1, 2025,
gross income shall not include a tenant’s
rent liability that is forgiven by a landlord
or rent forgiveness provided through funds
grantees received as a direct allocation
from the Secretary of the Treasury based
on the CAA, 2021. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR).
Other Loan Forgiveness – For taxable years
beginning on or after January 1, 2019, California
law allows an exclusion from gross income
for borrowers of forgiveness of indebtedness
described in Section 1109(d)(2)(D) of
the CARES Act as stated by section 278,
Division N of the CAA, 2021. The CAA, 2021,
allows deductions for eligible expenses paid
for with covered loan amounts. California
law conforms to this federal provision, with
modifications. For California purposes, these
deductions generally do not apply to an
ineligible entity. “Ineligible entity” means a
taxpayer that is either a publicly-traded company
or does not meet the 25% reduction from gross
receipts requirements under Section 311 of the
CAA, 2021. For California purposes, if you are an
ineligible entity and deducted eligible expenses
for federal purposes, enter the total amount
of those expenses deducted on the applicable
line(s) on your tax return. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR), or
go to ftb.ca.gov and search for AB 80.
California Microbusiness COVID-19 Relief
Grant – For taxable years beginning on or after
January 1, 2020, and before January 1, 2025,
for personal income tax filers, and beginning
on or after September 1, 2020, and before
January 1, 2025, for corporate filers, California
law allows an exclusion from gross income
for grant allocations received by a taxpayer

pursuant to the California Microbusiness
COVID-19 Relief Program that is administered
by the Office of Small Business Advocate
(CalOSBA). Enter the amount of this type of
income on the applicable line(s) on your tax
return. For more information, see instructions
in this publication and get Schedule CA (540) or
Schedule CA (540NR), and see R&TC Sections
17158.1 and 24311.
California Venues Grant – For taxable years
beginning on or after September 1, 2020,
and before January 1, 2030, California law
allows an exclusion from gross income for
grant allocations received by a taxpayer
pursuant to the California Venues Grant
Program that is administered by the CalOSBA.
Enter the amount of this type of income on
the applicable line(s) on your tax return.
For more information, see instructions in
this publication and get Schedule CA (540)
or Schedule CA (540NR), and see R&TC
Sections 17158 and 24312.
Coronavirus Aid, Relief, and Economic
Security Act – The CARES Act was enacted
on March 27, 2020. In general, the R&TC
does not conform to the changes. California
taxpayers continue to follow the IRC as of
the specified date of January 1, 2015, with
modifications. California law does not conform
to the following federal provisions under the
CARES Act:
•	Exclusion for certain employer payment of
student loans
•	 Health-savings account changes
The above list is not intended to be
all-inclusive of the federal and state
conformities and differences. For specific
adjustments, see instructions in this
publication, and get Schedule CA (540) or
Schedule CA (540NR), or refer to the R&TC.
Worker Status: Employees and Independent
Contractors – Some individuals may be
classified as independent contractors for
federal purposes and employees for California
purposes, which may also cause changes
in how their income and deductions are
classified. Proposition 22 was operative as of
December 16, 2020, and may affect a taxpayer’s
worker classification. For more information,
see instructions in this publication and get
Schedule CA (540) or Schedule CA (540NR).
Rental Real Estate Activities – For taxable
years beginning on or after January 1, 2020,
the dollar limitation for the offset for rental
real estate activities shall not apply to the low
ITEM

income housing credit program. For more
information, see R&TC Section 17561(d)(1),
and get form FTB 3801-CR, Passive Activity
Credit Limitations.
Commercial Cannabis Activity – Beginning
in taxable year 2020, California allows
individuals and other taxpayers operating
under the personal income tax law to claim
credits and deductions of business expenses
paid or incurred during the taxable year in
conducting commercial cannabis activity.
Sole proprietors are those that conduct
a commercial cannabis activity that is
licensed under California Medicinal and
Adult-Use Cannabis Regulation and Safety
Act (CA MAUCRSA). For more information,
see instructions in this publication, get
Schedule CA (540) or Schedule CA (540NR)
and get form FTB 4197.
Excess Business Loss Limitation – The CARES
Act made amendments to IRC Section 461(l)
by eliminating the excess business loss
limitation of noncorporate taxpayers for taxable
year 2020 and retroactively removing the
limitation for taxable years 2018 and 2019.
California law does not conform to those
amendments. Also, California law does not
conform to the federal changes in the ARPA
and the federal Inflation Reduction Act of 2022
that extend the limitation on excess business
losses of noncorporate taxpayers for taxable
years beginning after December 31, 2020, and
ending before January 1, 2029. Complete form
FTB 3461, California Limitation on Business
Losses, if you are a noncorporate taxpayer
and your net losses from all of your trades or
businesses are more than $289,000 ($578,000
for married/RDP taxpayers filing a joint return).
For more information, see instructions in this
publication and get Schedule CA (540) or
Schedule CA (540NR), and form FTB 3461.
Alimony – California law does not conform
to changes made by the TCJA to federal law
regarding alimony and separate maintenance
payments that are not deductible by the payor
spouse, and are not includable in the income
of the receiving spouse, if made under any
divorce or separation agreement executed
after December 31, 2018, or executed on or
before December 31, 2018, and modified
after that date (if the modification expressly
provides that the amendments apply). For
more information, see instructions in this
publication and get Schedule CA (540) or
Schedule CA (540NR).
DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

Registered Domestic Partners (RDPs) –
Under California law, RDPs must file their
California income tax returns using either the
married/RDP filing jointly or married/RDP filing
separately filing status. RDPs have the same
legal benefits, protections, and responsibilities
as married couples unless otherwise specified.
If you entered into in a same sex legal union
in another state, other than a marriage,
and that union has been determined to
be substantially equivalent to a California
registered domestic partnership, you are
required to file a California income tax return
using either the married/RDP filing jointly or
married/RDP filing separately filing status.
For purposes of California income tax,
references to a spouse, husband, or wife also
refer to a California RDP, unless otherwise
specified. When we use the initials RDP, they
refer to both a California registered domestic
“partner” and a California registered domestic
“partnership,” as applicable. For more
information on RDPs, get FTB Pub. 737, Tax
Information for Registered Domestic Partners.

Purpose

Use these guidelines to make adjustments to
federal adjusted gross income (AGI) that are
necessary because of current year or prior year
differences between California and federal law.
Generally, you report these adjustments directly
on Schedule CA (540 or 540NR). If required to
make multiple adjustments for any one line on
Schedule CA (540 or 540NR), attach a statement
to your return summarizing these adjustments.
In some cases, you need to complete other
forms or schedules to figure the adjustment
to carry to Schedule CA (540 or 540NR). See
“Order Forms and Publications” in your tax
booklet for information about ordering forms
or go to ftb.ca.gov/forms.

Franchise Tax Board Privacy
Notice on Collection
Our privacy notice can be found in annual tax
booklets or online. Go to ftb.ca.gov/privacy
to learn about our privacy policy statement,
or go to ftb.ca.gov/forms and search for
1131 to locate FTB 1131 EN-SP, Franchise Tax
Board Privacy Notice on Collection – Aviso de
Privacidad del Franchise Tax Board sobre la
Recaudación. To request this notice by mail,
call 800.338.0505 and enter form code 948
when instructed.
WHAT TO DO
FOR CALIFORNIA

Income
•	Active duty military pay

Special rules apply to active duty military pay and income from
services performed by certain spouses of military personnel.
Native Americans with military pay, also see “Native American
earned income exemption” in this section.

Get FTB Pub. 1032, Tax Information for Military
Personnel, for more information.

•	Combat zone foreign earned
income exclusion

For taxable years beginning on and after January 1, 2018,
California does not conform to the federal foreign earned income
exclusion for amounts received by certain U.S. citizens or
resident aliens with an abode in the U.S., specifically contractors
or employees of contractors supporting the U.S. Armed Forces in
designated combat zones.

Enter the amount excluded from federal
income on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section B, line 8d,
column C.

FTB Pub. 1001  2023  Page 5

ITEM
•	Native American earned
income exemption

DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

WHAT TO DO
FOR CALIFORNIA

Federal law taxes income received by Native Americans from
reservation sources.
California does not tax federally recognized tribal members living
in California Indian country who earn income from any federally
recognized California Indian country. Military compensation is
considered income from reservation sources.
Native Americans who are domiciled on an Indian reservation and
receive military compensation must refigure any AGI percentage
calculation(s) by first subtracting military compensation from
federal AGI.
Enrolled members who receive reservation sourced per capita
income must reside in their affiliated tribe’s Indian country to
qualify for tax exempt status. For more information, get form
FTB 3504, Enrolled Tribal Member Certification.

Enter earnings on Schedule CA (540),
Part I or Schedule CA (540NR), Part II,
Section A, applicable line 1a through
line 1h, column B. Enter any other income that
is included in federal income that is exempt
for California on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section B, line 8z,
column B.

•	 Income exempted by U.S. tax Income exempted by U.S. tax treaty under federal law may be
treaties
excluded for California only if the treaty specifically excludes the
income for state purposes. If a treaty does not specifically exempt
income from state income tax, California requires the reporting of
adjusted gross income from all sources.

Enter the amount excluded from federal
income on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A,
applicable line 1a through line 1h, column C.

•	 Sick pay received under
the Federal Insurance
Contributions Act and
Railroad Retirement Act

Enter qualifying sick pay included in federal
income on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 1a
or line 1h as applicable, column B.

California excludes from income the sick pay received under
these acts.

Total Amount from Federal Form(s) W-2, Box 1
•	 Employees and independent Some taxpayers may be classified as independent contractors for
contractors
federal purposes and as employees for California purposes.

•	 Nonresident employee
compensation of merchant
seamen, rail carriers, motor
carriers, and air carriers

For California, nonresidents may exclude the following from
gross income: compensation for the performance of duties of
certain merchant seamen and compensation of an employee of a
rail carrier, motor carrier, or air carrier.

Medicaid Waiver Payments Not Reported on Federal Form(s) W-2
•	 Exclusion for In-Home
California law allows an exclusion from gross income for IHSS
Supportive Services (IHSS)
supplementary payments received by IHSS providers. IHSS providers
supplementary payments
only receive a supplementary payment if they paid a sales tax on the
IHSS services they provide. The supplementary payment is equal to
the sales tax paid plus any increase in the federal payroll withholding
paid due to the supplementary payment.
Other Earned Income
•	 Employee income exclusions
for ridesharing fringe
benefits

Page 6  FTB Pub. 1001  2023

Under federal law and the provisions administered by the
Employment Development Department, certain qualified
transportation benefits are excluded from gross income. Under
the R&TC, there are no monthly limits for the exclusion of these
benefits and California’s definitions are more expansive.
Federal law provides an income exclusion for the value
of qualified parking provided to an employee. Federal law
also provides an income exclusion for commuter highway
transportation and transit passes provided to an employee.
California law provides an income exclusion for compensation
or the fair market value of other benefits (except for salary or
wages) received for participation in a California ridesharing
arrangement (subsidized parking, commuting in a third-party
vanpool, a private commuter bus, a subscription taxipool,
and monthly transit passes provided for employees and their
dependents).

If the taxpayer is classified as an employee for
California purposes, enter the amount reported
as gross income of the business from federal
Schedule C (Form 1040), Profit or Loss From
Business, line 7, as wages on Schedule CA (540),
Part I or Schedule CA (540NR), Part II, Section A,
line 1a, column C.
Enter the amount included in federal income
that qualifies for the California exclusion on
Schedule CA (540NR), Part II, Section A, line 1a,
column B. Get FTB Pub. 1031, Guidelines
for Determining Resident Status, for more
information.
Enter on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 1d,
column B the IHSS supplementary payments
included in federal wages.

Enter the amount of ridesharing fringe
benefits received and included in federal
income on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 1h,
column B.

DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

WHAT TO DO
FOR CALIFORNIA

•	 California Qualified Stock
Options (CQSOs)

California law provides an income exclusion for California
qualified stock options (issued on or after January 1, 1997, and
before January 1, 2002), that are exercised by an individual who
has earned income for the taxable year from the corporation
granting the CQSO of $40,000 or less, and has exercised options
for no more than 1,000 shares with a combined fair market
value of less than $100,000 (determined at the time the options
are granted). Get FTB Pub. 1004, Equity-Based Compensation
Guidelines, for more information.

Enter on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 1h,
column B the amount included in federal income
that qualifies for the California exclusion.

•	 Clergy housing exclusion

Both California and federal law allow members of the clergy
an exclusion from income for either the rental value of a home
furnished as part of their compensation or for a rental allowance
paid as part of their compensation to the extent it is used to
provide a home.
Effective January 1, 2002, under federal law, the exclusion for
the rental allowance is limited to the fair rental value of the home
(including furnishings and a garage) and the cost of utilities.
California does not limit the exclusion for the rental allowance to
the fair rental value of the home.

Enter on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A,
line 1h, column B the excess housing allowance
exclusion allowed for California over the federal
exclusion.

•	 Housing exclusion for stateemployed clergy

Effective January 1, 2003, for clergy members employed by the
State of California, up to 50% of gross salary may be allocated
for either the rental value of a home furnished or the rental
allowance paid to them to rent or provide a home.

If the amount of your federal exclusion is less than
your California exclusion, enter the adjustment on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 1h, column B. If the amount
of your federal exclusion is greater than your
California exclusion, enter the adjustment on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 1h, column C.

The TCJA extended combat zone tax benefits to the Sinai
Peninsula of Egypt. California does not conform.

Enter the amount of combat pay excluded from
federal income on Schedule CA (540), Part I
or Schedule CA (540NR), Part II, Section A,
line 1i, column C. Get FTB Pub. 1032 for more
information.

ITEM

Nontaxable Combat Pay Election
•	 Combat zone extended to
Egypt’s Sinai Peninsula

Taxable Interest Income
•	 Non-California bonds:
	

1)	 United States

Federal law requires the interest earned on federal bonds (U.S.
obligations) to be included in gross income. California does not
tax this interest income. The following are not considered U.S.
obligations for California purposes: Federal National Mortgage
Association (Fannie Mae); Government National Mortgage
Association (Ginnie Mae); or Federal Home Loan Mortgage
Corporation (Freddie Mac).

Enter the amount of federal bond interest
included in federal income on Schedule CA (540),
Part I or Schedule CA (540NR), Part II, Section A,
line 2, column B.

	

2)	 Other states

Federal law does not tax interest from state or local bonds.
California taxes the interest from non-California state and local
bonds.

Enter the interest from non-California state
or local bonds on Schedule CA (540), Part I
or Schedule CA (540NR), Part II, Section A,
line 2, column C.

California law excludes from gross income, interest income
received from settlement payments by individuals persecuted
by the regime that was in control of the Ottoman Turkish Empire
from 1915 until 1923, or the individual’s heirs or estate.

Enter the interest on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 2,
column B.

•	 Interest income received
from settlement payments
from individuals persecuted
during the Ottoman Turkish
Empire from 1915-1923

FTB Pub. 1001  2023  Page 7

DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

WHAT TO DO
FOR CALIFORNIA

California does not tax dividends paid by a fund attributable
to interest received from U.S. obligations or California state
or municipal obligations if at least 50% of the fund’s assets
would be exempt from California tax when held by an individual.
California taxes dividends derived from mutual funds that are
paid from interest received from obligations (bonds) issued by
non-California states or municipalities in other states. The fund
will provide a statement regarding the dividends it pays.

If the value of U.S. and California state or
municipal obligations is at least 50% of the fund’s
total assets, enter the amount of exempt interest
dividends that are attributed to U.S. obligations
included in federal income on Schedule CA (540),
Part I or Schedule CA (540NR), Part II, Section A,
line 2, column B.
If the taxpayer received any dividends from
the fund attributable to obligations issued
by non-California states or municipalities
within other states that were excluded from
the taxpayer’s federal income, enter that
excluded amount on Schedule CA (540), Part I
or Schedule CA (540NR), Part II, Section A,
line 2, column C.

•	 Noncash patronage dividend
from farmers’ cooperatives
or mutual associations

Federal law taxes the dividend in the year of receipt. California
permits an election to include the dividend in gross income either
when received or when redeemed. Once an election is made,
this method must be followed unless a change in the method of
reporting is approved by the FTB.

If you elect or elected to include the dividend in
the year redeemed, enter the amount received on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 3, column B. Enter the
amount redeemed on Schedule CA (540), Part I
or Schedule CA (540NR), Part II, Section A, line 3,
column C.

•	 Controlled Foreign
Corporation (CFC)

California taxes CFC dividends in the year distributed rather than
in the year earned.

If CFC dividends are earned in one year and
distributed in a later year, enter the dividends
included in federal income for the year earned on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 3, column B and enter
the dividends for the year distributed on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 3, column C.

ITEM
•	 Exempt interest dividends
(mutual funds)

Dividend Income

•	 Distributions of pre-1987
Prior to 1987, California treated all federal S corporations as
earnings from S corporations C corporations. So when a federal S corporation first becomes
a California S corporation, its initial accumulated adjustments
account (AAA) has a zero balance regardless of the federal
AAA balance. If distributions from the S corporation exceed
the California balance in the AAA, you have a distribution from
pre‑1987 earnings.

Enter distributions from pre-1987 earnings (or
earnings in any later year that the corporation
was a federal S corporation and a California C
corporation) on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 3,
column C.

•	 Regulated Investment
Company (RIC)

California taxes the undistributed capital gain from a RIC in the
year distributed rather than in the year earned.

If capital gain from a RIC is earned in one year and
distributed in a later year, enter the capital gain
included in federal income for the year earned on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 3, column B and enter
the capital gain for the year distributed on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 3, column C.

•	 IRA basis adjustments

There may be differences in the taxable amount of the
distribution depending on when the contributions were made,
if you changed residency status after you first began making
contributions to your IRA, or made different deductions for
California because of differences between your California and
federal self-employment income. You will need to calculate your
IRA basis as if you were a California resident for all prior years.

Get FTB Pub. 1005, Pension and Annuity
Guidelines, for more information.

•	 Roth IRAs

Federal law and California law are the same regarding contributions,
conversions, and distributions. However, the taxable amount of a
distribution may not be the same because of basis differences.

Get FTB Pub. 1005 for more information.

California does not tax railroad retirement benefits reported on
federal Form RRB-1099-R, Annuities or Pensions by the Railroad
Retirement Board, or RRB-1099, Payments by the Railroad
Retirement Board.

Enter on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 5b,
column B, the amount of Tier 1 (non-Social Security
equivalent) or Tier 2 railroad retirement benefits
included in adjusted gross income on your federal
return. Get FTB Pub. 1005 for more information.

IRA Distribution

Pensions and Annuities
•	 Railroad retirement benefits

Page 8  FTB Pub. 1001  2023

DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

WHAT TO DO
FOR CALIFORNIA

•	 Pension plan – small
business tax credit for new
retirement plan expenses

Federal law allows an income tax credit for 50% of the first
$1,000 in administrative and retirement-education expenses for
any small business that adopts a new qualified defined benefit or
defined contribution plan. The federal deduction is reduced by
the amount of the credit. California has no similar credit.

Enter the amount of the income tax
credit on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section B, line 3,
line 5, or line 6, column B.

•	Employer-sponsored
pensions and annuities (for
annuity starting dates after
July 1, 1986, and before
January 1, 1987) if you
elected to use the “three-year
rule” for California

Under federal law, no “three-year rule” is allowed for any
individual whose annuity starting date is after July 1, 1986.
Under California law, an individual whose annuity starting date
was after July 1, 1986, and before January 1, 1987, could elect to
use the “three-year rule” if: 1) the employer paid part of the cost
and 2) during the three years from the date of the first annuity
payment, the total amount receivable will equal or exceed the
cost (investment) in the contract.

If your annuity starting date was after
July 1, 1986, and before January 1, 1987, and
you elected to use the three-year recovery rule
for California, an adjustment is required. Enter
the difference on Schedule CA (540), Part I
or Schedule CA (540NR), Part II, Section A,
line 5b, column C. Get FTB Pub. 1005 for more
information.

•	 Canadian Registered
Retirement Savings Plans
(RRSP)

Under both federal and California law, the RRSP does not
qualify as an Individual Retirement Account (IRA) and does not
receive IRA treatment. The federal treaty that allows taxpayers to
elect to defer taxation on their RRSP earnings until the time of
distribution does not apply for California income tax purposes.
California residents must include their RRSP earnings in their
taxable income in the year earned.

Enter on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 2,
line 3, or line 7, column C, the earnings from
the RRSP.

•	 Interest/dividend income

Federal law allows taxpayers to exclude from gross income
the interest and dividends earned on HSAs. California does not
conform. Therefore, all interest earned and any taxable dividends
earned on HSAs are taxable in the year earned. As a result of
this tax treatment, the taxpayer has a California basis in the HSA
account.

Enter the current year interest earned as an
adjustment on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A,
line 2, column C. Enter the current year taxable
dividends as an adjustment on Schedule CA (540),
Part I or Schedule CA (540NR), Part II, Section A,
line 3, column C.

•	Contributions

Federal law allows taxpayers a deduction for contributions to
an HSA account. Contributions made on behalf of an eligible
individual by an employer are excluded from federal Form W-2,
Wage and Tax Statement, wages. California does not conform
to this provision.

ITEM

Health Savings Account (HSA)

•	Distributions

•	 Rollover from an Archer
Medical Savings Account
(Archer MSA) to an HSA

Enter the amount from Schedule CA (540),
Part I or Schedule CA (540NR), Part II, line 13,
column A, on line 13, column B. Enter the amount
of any employer contribution from federal
Form W-2, box 12, code W on Schedule CA (540),
Part I or Schedule CA (540NR), Part II, Section A,
line 1h, column C.
Distributions that are not used for qualified medical expenses
Enter the required adjustment from
are includible in federal gross income. The amount taxable under Schedule CA (540), Part I or Schedule CA (540NR),
federal law, less interest and dividend income previously taxed by Part II, line 8f, column A, on line 8f, column B.
California, is not taxable by California.
Generally, federal law and California law are the same. However,
since California does not recognize Health Savings Accounts
(HSAs), a rollover from an Archer MSA to an HSA is treated
as distribution not used for qualified medical expenses. For
California, the distribution is included in California taxable income
and the additional 12.5% tax applies (R&TC Section 17215).

Enter the amount rolled over from an Archer
MSA to an HSA, less interest or dividend
earnings previously taxed by California, on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, line 8e, column C.

California does not tax social security benefits and equivalent
Tier 1 railroad retirement benefits.

Enter on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 6,
column B, the amount of social security benefits
and equivalent Tier 1 railroad retirement benefits
you included in adjusted gross income on your
federal return.

The TCJA amended IRC Section 1221 excluding a patent,
invention, model or design (whether or not patented), and a
secret formula or process held by the taxpayer who created the
property (and certain other taxpayers) from the definition of a
capital asset. California does not conform.

Report your capital assets on Schedule D (540
or 540NR), California Capital Gain or Loss
Adjustment, and to figure the adjustment to make
on Schedule CA (540 or 540NR).

Social Security Benefits
•	 Social security benefits and
equivalent Tier 1 railroad
retirement benefits

Capital Gains or Losses
•	 Capital assets

FTB Pub. 1001  2023  Page 9

DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

WHAT TO DO
FOR CALIFORNIA

The TCJA established opportunity zones. IRC Sections 1400Z-1
and 1400Z-2 provide a deferral of inclusion of gross income for
capital gains reinvested or invested in a qualified opportunity
zone fund, and exclude capital gains from the sale or exchange of
an investment of such funds. California does not conform.

Use California Schedule D (540 or 540NR) if
you claim the federal IRC Sections 1400Z-1 and
1400Z-2 on your federal return. Enter the entire
gain realized on Schedule D (540 or 540NR),
line 1, column (e).

For federal purposes, the capital gains deferred as a result of
reinvesting or investing are included in gross income in the
year of sale or disposition of the investment. California does not
conform.

If, for California purposes, gains from investment
in qualified opportunity zone property had been
included in income during previous taxable years,
do not include the gain in the current year income.

•	 Gain on sale or disposition of
a qualified assisted housing
development to low-income
residents or to specified
entities who maintain
housing for low-income
residents

Federal law does not allow special treatment on gains related to
the sale of certain assisted housing. California law permits the
deferral of such gain, under certain conditions, if the proceeds
are reinvested in residential real property (other than a personal
residence) within two years of the sale.

Enter the transaction on California Schedule D
(540 or 540NR), line 1. In column (e)
enter “-0- R&TC Section 18041.5.” Reduce
the basis of replacement property by the
gain deferred. Attach a schedule to your
return reflecting computation of basis in the
replacement property, or a statement of intent to
replace within the replacement period.

•	 Gain on sale of personal
residence

For sale or exchanges after May 6, 1997, federal law allows
an exclusion of gain on the sale of a personal residence in
the amount of $250,000 ($500,000 if married filing jointly).
The taxpayer must have owned and occupied the residence
as a principal residence for at least 2 of the 5 years before the
sale. California conforms to this provision. However, California
taxpayers who served in the Peace Corps during the 5 year
period ending on the date of the sale may reduce the 2 year
period by the period of service, not to exceed 18 months.

If there is a difference between the amounts
excluded (or depreciated, if recapture
applies) for federal and California, complete
California Schedule D (540 or 540NR).
Transfer the amount from California
Schedule D (540 or 540NR), line 12a, to
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section A, line 7, column B (if gain
is less than federal). Transfer the amount
from California Schedule D (540 or 540NR),
line 12b, to Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section A, line 7,
column C (if gain is more than federal).

•	 Undistributed capital gains
for regulated investment
company (RIC) shareholders

Federal law requires certain undistributed capital gains reported
Do not enter the amount of undistributed capital
on federal Form 2439, Notice to Shareholder of Undistributed
gains on California Schedule D (540 or 540NR).
Long-Term Capital Gains, to be included in the gross income of
the mutual fund shareholder and allows a tax credit for the capital
gains tax paid by the RIC. California has no similar provision.

•	 Gain or loss on sale of
property inherited before
January 1, 1987

Federal gain or loss may differ from the California gain or loss
due to differences in the basis of property. For property inherited
on or after January 1, 1987, the California basis and the federal
basis are the same.

Report the amount of California capital gains and
losses on California Schedule D (540 or 540NR).

•	 Capital loss carrybacks

Federal law allows a deduction for carrybacks of certain capital
losses. California has no similar provision.

Report the amount of California capital gains and
losses on California Schedule D (540 or 540NR).

•	 Exclusion of deferral and
gain on the sale of qualified
small business stock

Federal law allows deferral and exclusion under IRC Sections 1045
and 1202 of the gain on sale of qualifying small business stock
that was held for more than five years. California does not
conform.

Use California Schedule D (540 or 540NR) if
you claim IRC Section 1045 deferral or IRC
Section 1202 exclusion on your federal return.
Enter the entire gain realized on Schedule D (540
or 540NR), line 1, column (e).

ITEM
•	 Deferral and exclusion of
capital gains in qualified
opportunity zone funds

Additional Income
Taxable Refunds, Credits, or Offsets of State and Local Income Taxes
•	 State income tax refund

Federal law includes the state income tax refund in income.
California excludes the state income tax refund from income.

Enter the amount of state income tax refund
included in federal income on Schedule CA (540),
Part I or Schedule CA (540NR), Part II, Section B,
line 1, column B.

•	 Alimony and separate
maintenance payments
received

Under federal law, the TCJA, alimony and separate maintenance
payments are not includable in the income of the receiving
spouse, if made under any divorce or separation agreement
executed after December 31, 2018, or executed on or before
December 31, 2018, and modified after that date (if the
modification expressly provides that the amendments apply).
California does not conform.

Enter the alimony and separate maintenance
payment received not included in federal
income on Schedule CA (540), Part I or
Schedule CA (540NR), Part II, Section B, line 2a,
column C.

•	 Alimony received by a
nonresident alien

For a nonresident alien, alimony received which was not included
on the federal return must be included on the California return.

Enter the amount not included in federal income on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section B, line 2a, column C.

Alimony Received

Page 10  FTB Pub. 1001  2023

ITEM

DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

WHAT TO DO
FOR CALIFORNIA

Business Income or (Loss) — Depreciation, Amortization, and Property Expensing
•	 Income from a business,
trade, or profession
conducted partially in
California

If a nonresident owns a business, trade, or profession carried
on within California that is an integral part of a unitary business
carried on both within and outside California, the amount of
such income having its source in California is determined
in accordance with the provisions of R&TC Sections 25120
through 25141.

Gross income from the entire business, trade,
or profession is included in the nonresident’s
adjusted gross income from all sources. The
nonresident’s California source business income
is generally determined by an apportionment
formula. Refer to Cal. Code Regs., tit. 18,
Section 17951.

•	 Research and experimental
expenditures

For federal purposes, costs paid or incurred on or after
January 1, 2022, for specified research and experimental
expenditures must be capitalized and amortized ratably over a
five-year period. California does not conform.

Use form FTB 3885A, Depreciation and Amortization
Adjustments, to figure the adjustment to make on
Schedule CA (540 or 540NR).

•	 Asset expense election
(IRC Section 179)

Federal limitation amounts are different than California limitation
amounts. California allows an expense election up to $25,000
and California phaseout starts at $200,000. For qualified
IRC Section 179 Gulf Opportunity Zone property, the maximum
deduction is higher than the deduction for most IRC Section 179
property.
Federal law allows an IRC Section 179 expense election for
off-the-shelf software and certain qualified real property.
California does not conform.

Use form FTB 3885A to figure the adjustment to
make on Schedule CA (540 or 540NR).

•	 MACRS recovery period for
nonresidential real property

For federal purposes, the recovery period for nonresidential
real property is 39 years. California conformed to this provision
on January 1, 1997. The California recovery period of 31.5
years should be used for property placed in service on or after
May 13, 1993, and before January 1, 1997.

Use form FTB 3885A to figure the adjustment to
make on Schedule CA (540 or 540NR).

•	 Alternative Depreciation
System (ADS) recovery
period for certain residential
rental property

For federal purposes, the recovery period for taxable years
Use form FTB 3885A to figure the adjustment to
beginning after December 31, 2017, is 30 years for residential
make on Schedule CA (540 or 540NR).
rental property held by an electing real property trade or business
that was placed in service prior to January 1, 2018, but that was
not subject to ADS prior to that date. California does not conform
to the federal change in the recovery period.

•	 Depreciation of assets
acquired prior to
January 1, 1987

Federal law allowed the rapid write-off of tangible personal
property and buildings over recovery periods which were shorter
than economic useful lives under the Accelerated Cost Recovery
System (ACRS). California law in general did not conform to
federal law but did allow ACRS for certain residential rental
property constructed in California on or after July 1, 1985, and
before January 1, 1987.

•	 Additional depreciation
(IRC Section 168(k))

Federal law allows an additional 30% first-year depreciation deduction Use form FTB 3885A to figure the adjustment to
and AMT depreciation adjustment for property placed in service
make on Schedule CA (540 or 540NR).
after September 10, 2001. The first-year depreciation deduction is
increased to 50% for property placed in service after May 5, 2003. For
assets placed in service on or after September 11, 2001, and before
January 1, 2005, California did not conform to these provisions.
Federal law allows an additional 50% first-year special depreciation
for certain qualified property acquired before September 28, 2017,
and placed in service after September 27, 2017. The percentage
is phased down from 50% by 10% per calendar year beginning in
2018. California did not conform to this provision.
The TCJA increased the amount of the additional first-year
depreciation allowance from 50% to 100% for certain
qualified property acquired and placed in service after
September 27, 2017, and before January 1, 2023. The 100%
allowance is phased down by 20% per calendar year for property
placed in service in taxable years beginning after 2022. The
additional first-year depreciation deduction is allowed for new
and used property. California does not conform to this provision.

•	 Amortization of goodwill and
certain other intangibles

Property classified as IRC Section 197 property under federal
Use form FTB 3885A to figure the adjustment to
law is also IRC Section 197 property for California purposes.
make on Schedule CA (540 or 540NR).
However, for IRC Section 197 property acquired before
January 1, 1994, the California basis as of January 1, 1994, must
be amortized over the remaining federal amortization period.

Use form FTB 3885A to figure the adjustment to
make on Schedule CA (540 or 540NR).

FTB Pub. 1001  2023  Page 11

DIFFERENCES BETWEEN FEDERAL
AND CALIFORNIA LAW

ITEM

WHAT TO DO
FOR CALIFORNIA

•	 Business property moves
into California

Depreciation methods and useful lives of trade or business
property must be acceptable to California.

If an unacceptable method was used before the
move into California, use the straight-line method
to compute the basis in the property.

•	 Accelerated depreciation for
business property on Indian
reservations

Under federal law, qualified Indian reservation property placed in
service after January 1, 1994, and before January 1, 2022, will
be subject to special MACRS recovery periods. California did not
conform to this provision.

Use form FTB 3885A to figure the adjustment to
make on Schedule CA (540 or 540NR).

•	 Classification of certain
race horses as three-year
property.

Under federal law, race horses that are two years old or younger
and are placed in service after December 31, 2020, and before
January 1, 2022, are subject to a special recovery period of three
years. California law does not conform to this provision.

Use form FTB 3885A to figure the adjustment to
make on Schedule CA (540 or 540NR).

•	 Recovery period for a
motorsports entertainment
complex.

Under federal law, motorsports entertainment complexes placed
in service after December 31, 2020, and before January 1, 2026,
are subject to a special recovery period of seven years. California
law does not conform to this provision.

Use form FTB 3885A to figure the adjustment to
make on Schedule CA (540 or 540NR).

•	 Amortization of pollution
control facilities

Both California and federal law provide for accelerated write-off
of pollution control facilities. California law only allows the
write-off of facilities located in California.

Enter the amortization for the California facilities on
form FTB 3885A. Compare the California amortization
to the federal amortization and enter the difference on
Schedule CA (540), Part I or Schedule CA (540NR),
Part II, Section B, line 3, line 5, or line 6, column C.

•	 Expenditure for tertiary
injectants incurred in the
crude oil industry

Federal law allows a deduction for the cost of tertiary injectants
which are part of a tertiary recovery system. California law allows
a depreciation deduction if the tertiary injectant qualifies as
property used in a trade or business or is held for the production
of income.

Enter the amount of tertiary injectants deducted
on your federal return on Schedule CA (540),
Part I or Schedule CA (540NR), Part II, Section B,
line 3, column C. Prepare a schedule reflecting
the depreciation computation of tertiary injectants
placed in service during the taxable year. Then
complete form FTB 3885A and attach it and your
depreciation schedule to your return.

•	 Reduced recovery periods
for fruit bearing grapevines
replaced in a California
vineyard on or after
January 1, 1992, as a result
of phylloxera infestation and
on or after January 1, 1997,
as a result of Pierce’s disease

Federal law generally requires a 10-year recovery period for fruit
bearing vines for purposes of accelerated cost recovery and a
20-year recovery period for those vines under an alternative
depreciation system. California law allows 5 and 10-year recovery
periods, respectively.

Prepare a schedule reflecting the depreciation
computation of grapevines placed in service
on or after January 1, 1992, for phylloxera
infestation, and placed in service on or after
January 1, 1997, for Pierce’s disease. Then
complete form FTB 3885A and attach it and your
depreciation schedule to your return.

•	 Income forecast method of
depreciation

For assets placed in service after August 5, 1997, federal law limits
the income forecast method of depreciation to film, video tape,
sound recordings, copyrights, books, patents, and other property
to be specified by federal regulations. California conformed to this
limitation for