What Form 3885 (2011) Is For
Corporations use Form 3885 (2011) to calculate depreciation and amortization deductions that comply with California law, which often diverges from federal rules. The form accounts for differences in the treatment of business assets between federal and state law, including personal property, real estate, and intangible assets. It is required to compute depreciation using methods such as the straight-line method or the declining balance method, as outlined in the California Revenue and Taxation Code.
Because California does not conform to the Internal Revenue Code in areas such as bonus depreciation and IRC Section 179, this form is necessary for accurate corporation depreciation and amortization reporting on corporate tax returns.
When You’d Use Form 3885 (2011)
Form 3885 (2011) is filed when inevitable depreciation or amortization calculations require adjustments to meet California-specific rules.
Original tax filings
Corporations must use Form 3885 (2011) when they place new depreciable property in service during the income year and are required to calculate depreciation and amortization under California Revenue and Taxation Code rules.
Differences from federal law
The form is required if there are differences between federal and state depreciation, such as disallowed bonus depreciation under Section 168(k) or different IRC Section 179 limits.
Amended tax years
Corporations must submit an updated Form 3885 (2011) when filing amended returns that revise depreciation methods or correct errors in prior-year deductions.
Intangible assets or real estate adjustments
The form is used when amortizing intangible assets or depreciating real estate that must follow California’s depreciation methods rather than federal rules.
Entities treated as corporations
Limited Liability Companies that elect to be taxed as corporations must file Form 3885 (2011) to report corporation depreciation adjustments in compliance with Franchise Tax Board rules.
Key Rules or Details for 2011 Tax Year
Several rules specific to the 2011 tax year affect how Form 3885 (2011) must be completed and filed.
California does not allow federal bonus depreciation
Any bonus depreciation claimed under federal Section 168(k) must be added back on the California return, since the state does not conform to that provision of the Internal Revenue Code.
California restricts IRC Section 179
For the 2011 tax year, the maximum allowable deduction under IRC Section 179 was $25,000 in California, compared to $500,000 under federal law, and this difference must be reflected using Part I of Form FTB 3885.
Depreciation methods must comply with California law
Taxpayers are required to use depreciation methods such as the straight-line method, declining balance, Modified Accelerated Cost Recovery System, or the Sum-of-the-Years'-Digits method, as specified in California tax law.
No automatic conformity to federal cost segregation
California does not always recognize federal cost segregation study results, so businesses must verify recovery periods using the Class Life Asset Depreciation Range and adjust depreciation accordingly.
Listed property is subject to special rules
Section 280F of the Internal Revenue Code imposes limits on depreciation of listed property, such as passenger vehicles; California generally follows these limitations but applies its own calculations on Form 3885 (2011).
Step-by-Step (High Level)
Form 3885 (2011) is completed using information from your federal tax documents, but must reflect California-specific rules for depreciation and amortization.
Gather federal information first
Begin by reviewing Federal Form 4562 to identify federal depreciation and amortization deductions, including IRC Section 179 amounts and bonus depreciation claimed under federal law.
Complete Part I for IRC Section 179
Enter California's maximum $25,000 IRC Section 179 limit and compute any carryover due to business income limitations; disallowed amounts are carried forward and reported on future tax forms.
Complete Part II for depreciation
In this section, calculate California depreciation using approved depreciation methods such as the straight-line method, declining balance, or Modified Accelerated Cost Recovery System, and list each asset’s adjusted basis and depreciation rate.
Complete Part III for adjustments
Compare federal and California depreciation totals to determine any California adjustments, and report the difference on the corporation’s Schedule CA or directly on the California tax return.
Include amortization when required
If you are amortizing intangible assets such as goodwill, enter details in Part IV using the applicable California Revenue and Taxation Code sections, and reconcile any difference from federal amortization reported on Federal Form 4562.
Common Mistakes and How to Avoid Them
Errors on Form 3885 (2011) often occur due to confusion between federal and state depreciation rules, but these mistakes can be avoided with proper documentation and compliance.
Using federal bonus depreciation
Corporations sometimes apply 100 percent federal bonus depreciation under Section 168(k); to avoid errors, businesses must exclude this figure and recalculate depreciation using California-approved methods.
Applying federal IRC Section 179 limits
Taxpayers often apply the $500,000 federal IRC Section 179 limit instead of California’s $25,000 limit; always use Part I of Form FTB 3885 to reflect the lower state limit and phase-out threshold correctly.
Incorrect basis adjustments
Failure to adjust asset basis for California IRC Section 179 expensing or state tax credits results in overstated deductions; ensure accurate tracking of all basis reductions as per California law.
Misreporting adjustments on the tax return
Some filers enter California depreciation totals without computing the difference from federal deductions; to stay compliant, complete Part III carefully and ensure adjustments match your corporation’s tax liability reporting.
Not tracking amortization or depreciation carryforwards
Entities sometimes omit disallowed IRC Section 179 amounts or intangible asset amortization carryforwards; maintain detailed schedules and carry these figures into future tax filings using the appropriate tax forms and supporting records.
What Happens After You File
Once Form 3885 (2011) is filed along with Form 100 or Form 100W, the Franchise Tax Board reviews the submission to ensure proper California adjustments were made for depreciation and amortization. If discrepancies are found between federal and California depreciation totals or asset basis calculations, the FTB may request supporting documentation or issue a notice of adjustment. Processing typically takes two to four months, depending on whether the return was e-filed or mailed.
FAQs
Can I use the same depreciation schedule for both federal and California returns?
No, you must keep separate depreciation schedules because California law does not conform to all federal rules, especially regarding bonus depreciation and IRC Section 179.
What role does Form 3115 play in changing depreciation methods?
Form 3115 is used when applying for a change in accounting method, including depreciation methods. However, any change must still comply with the California Franchise Tax Board's requirements for tax compliance.
Does the Franchise Tax Board recognize the benefits of a cost segregation study?
A cost segregation study may be used for federal depreciation purposes; however, California may require adjustments based on the California Revenue and Taxation Code, specifically Sections 24916 and 24917.
How does depreciation affect rental income on a corporate return?
Depreciation reduces taxable rental income, but calculations must follow California-specific methods and may differ significantly from those used under Internal Revenue Code provisions.
What depreciation rules apply to insurance companies and restoration contractors operating in California?
Insurance companies and restoration contractors must adhere to the same tax depreciation rules in California. They cannot rely solely on IRS Publication 946 or general Internal Revenue Service guidance for accurate filing.
