What California Schedule CA (540) Is For
Schedule CA (540) is the form California residents use to adjust their federal income and deductions so they align with California tax law. Because California conforms to the Internal Revenue Code only through January 1, 2015, it doesn’t automatically follow federal tax changes made after that date. This creates differences in what’s taxable, what’s deductible, and how income is calculated. Schedule CA functions as the bridge between your federal Form 1040 and your California Form 540.
The form has two major sections: Part I adjusts your federal adjusted gross income (AGI) to arrive at your California AGI, while Part II adjusts federal itemized deductions to determine your California itemized deductions. Each entry is shown across three columns—Column A (federal amounts), Column B (subtractions), and Column C (additions)—allowing you to modify federal amounts to reflect California rules.
When You’d Use Schedule CA (540)
You must use Schedule CA (540) anytime federal and California tax laws differ for your income or deductions. Common triggers include Social Security benefits, interest income, business or rental income, alimony differences, capital gains, and deductions California does not allow federally (and vice versa). Without Schedule CA, California would not be able to correctly compute your taxable income.
Schedule CA is due with your 2023 Form 540 by April 15, 2024, or October 15, 2024, if you file under California’s automatic extension. If you amend your return, you must attach a corrected Schedule CA to Schedule X and submit a revised Form 540. Refund claims generally must be filed within four years of the original due date or one year from the date of payment.
For 2023, the form also incorporates new California exclusions—such as wildfire settlement payments, HOPE for Children Trust account exclusions, and several COVID-related program exclusions—that may require adjustments if included in federal income.
Key Rules or Details for the 2023 Tax Year
California Follows the IRC as of January 1, 2015
California does not automatically adopt major federal laws passed after this date, including:
- Tax Cuts and Jobs Act
- SECURE Act
- CARES Act
- American Rescue Plan Act
As a result, California taxpayers must adjust many federal amounts to match state rules.
How the Three-Column System Works
- Column A — The amount from your federal return.
- Column B — Subtractions reducing California income.
- Column C — Additions increasing California income.
Amounts are entered as positive numbers unless instructions say otherwise.
Major Differences for 2023
- Social Security benefits — Fully excluded by California (subtract in Column B).
- U.S. Treasury interest — Excluded by California (subtract in Column B).
- Out-of-state municipal bond interest — Taxable by California (add in Column C).
- State income tax refunds — Not taxable in California (subtract).
- Alimony rules — California still taxes alimony received and allows deductions for alimony paid; federal law does not for post-2018 divorces.
- Moving expense deductions — Allowed in California using Form FTB 3913, while suspended federally.
- Excess business losses — California applies its own limits using Form FTB 3461.
- PPP loan forgiveness — Excluded by both federal and California law, except for entities California considers ineligible, which may need to add back expenses.
- Registered domestic partners — Must combine federal amounts because they file jointly for California but not federally.
Step-by-Step (High Level)
Step 1: Finish Your Federal Return
You cannot complete Schedule CA without a finalized federal Form 1040, because Column A requires federal amounts.
Step 2: Gather California-Specific Documents
Collect Social Security statements, interest records, refund notices, business depreciation schedules, and any documents related to California-only exclusions or adjustments.
Step 3: Complete Part I, Section A — Income
Key items include:
- Wages (Lines 1a–1i) — Adjust for exclusions such as Native American income or sick pay differences.
- Interest (Line 2) — Subtract U.S. Treasury interest; add out-of-state municipal bond interest.
- Dividends (Line 3) — Adjust if California treatment differs.
- Retirement income (Lines 4–5) — Adjust IRA and pension amounts when California rules differ.
- Social Security (Line 6) — Subtract the full federally taxable portion.
- Capital gains (Line 7) — Adjust if California basis differs; attach Schedule D (540) if necessary.
Step 4: Complete Part I, Section B — Additional Income
Includes:
- State tax refunds (subtract)
- Alimony received (add if non-taxable federally under post-2018 rules)
- Business income (use FTB 3801 or FTB 3885A for depreciation and loss adjustments)
- Rental and royalty income (adjust for nonconformity items)
- Unemployment (California generally taxes unemployment differently than federal rules in some years)
- Other income — Include wildfire settlement exclusions and COVID-related adjustments if applicable.
Step 5: Complete Part I, Section C — Adjustments to Income
Transfer federal adjustments, then add or subtract for differences such as moving expenses, alimony paid, IRA deductions, student loan interest, and self-employed health insurance when California rules diverge.
Step 6: Calculate California AGI
Add adjusted income from Sections A and B, subtract Section C adjustments, and enter the result on Line 27. This amount flows directly to Form 540.
Step 7: Complete Part II — Itemized Deductions
Transfer federal deductions from Schedule A, then:
- Adjust for California’s rules on mortgage interest
- Remove the federal $10,000 SALT cap (California does not apply it)
- Adjust medical expenses and charitable contributions when needed
Use the larger of California itemized deductions or the Form 540 standard deduction.
Step 8: Attach to Form 540
Place Schedule CA behind Page 6 of your Form 540 and include all required supporting forms.
Common Mistakes and How to Avoid Them
- Failing to file Schedule CA when required — If you have Social Security income, interest income, itemized deductions, or business income, Schedule CA is almost always necessary.
- Entering negative numbers in Columns B or C — These columns must show positive values; incorrectly using negatives causes miscalculations.
- Forgetting to subtract Social Security — California excludes all Social Security, but taxpayers frequently omit this adjustment.
- Leaving out U.S. Treasury interest exclusions — Carefully examine 1099-INT box 3 for Treasury interest to subtract.
- Missing add-backs for out-of-state municipal bond interest — This interest is exempt federally but taxable in California.
- RDPs entering uncombined amounts — Registered domestic partners must combine federal data before entering amounts in Column A.
- Business income mistakes — California depreciation, PPP rules, and passive-activity limits differ from federal law; required forms like FTB 3885A and FTB 3801 are often missing.
- Ignoring 2023 special exclusions — COVID-related grants, wildfire settlements, and similar exclusions must be properly reflected.
What Happens After You File
Schedule CA may lengthen processing time, especially for paper returns. The FTB compares Column A amounts with your federal return and often issues notices if differences appear unexplained. Common adjustments involve Social Security exclusions, Treasury interest, and out-of-state bond interest. Missing schedules for business income or depreciation may trigger information requests.
Refunds or tax owed may differ significantly from your federal outcome because California AGI often changes once adjustments are applied. If errors are discovered after filing, submit a corrected Schedule CA with Schedule X and an amended Form 540. Keep records for at least four years.
FAQs
Do I need Schedule CA if I take the standard deduction and only have W-2 wages?
Not usually. If you have no Social Security, no investment income, and no federal-California differences, Schedule CA may not be required. Tax software will tell you if it’s needed.
I received Social Security benefits but they weren’t taxable federally—should I still file Schedule CA?
If federal Form 1040 shows zero taxable Social Security, there’s no adjustment to enter. However, you may still need Schedule CA for other differences.
What does it mean that California conforms to federal law “as of January 1, 2015”?
It means California follows federal rules in effect at that point in time. Later federal tax changes do not automatically apply unless California passes separate conforming legislation.
How do RDPs complete Column A when federal filing is separate?
Registered domestic partners must combine federal amounts from both partners’ separate federal returns to complete Column A of Schedule CA.
Do I need to report PPP loan forgiveness?
Not unless your business is an ineligible entity, such as a publicly traded company or one that didn’t meet California’s participation rules. Otherwise, PPP forgiveness is excluded federally and for California.
Can I fix Schedule CA errors after filing?
Yes. File an amended return using Schedule X and attach a corrected Schedule CA and revised Form 540. Refund claims must fall within the allowed time window.
For official guidance and forms, visit the California Franchise Tax Board: https://www.ftb.ca.gov.
