What Form 3885 (2017) Is For
Form 3885 (2017) is a California tax form used by corporations to calculate depreciation and amortization deductions under state tax law when these amounts differ from federal reporting. It is required for corporations filing Form 100 or Form 100W, as well as limited liability companies classified as corporations.
The purpose of this form is to compute depreciation expenses using California’s rules, which do not conform to specific federal provisions, such as bonus depreciation under IRC Section 168(k) or enhanced IRC Section 179 expensing. The form ensures accurate California adjustments for taxable income, taking into account the differences between federal and state depreciation methods.
When You’d Use Form 3885 (2017)
This section explains the typical situations when taxpayers must complete Form 3885 (2017) for California corporate returns.
Federal and California depreciation differ
This applies when bonus depreciation is taken federally and not allowed in California; therefore, the corporation must calculate California adjustments on Form 3885.
Claiming IRC Section 179 or Section 179 expensing
This applies when the corporation uses Section 179 deductions and must apply California’s lower limits and the Section 179 business income limitation.
Filing returns for corporations or limited liability companies classified as corporations
This applies when business assets require different depreciation methods for California filings.
Reporting intangible amortization under IRC Section 197 or state rules
This applies when corporations amortize intangible assets in accordance with the California Revenue and Taxation Code.
Amended or late filings requiring recalculation
This applies when recalculating depreciation expenses on Form 100 or Form 100W, which requires updated amounts from Form 3885.
Key Rules or Details for 2017 Form 3885
These rules explain how California applies corporate depreciation and amortization for the 2017 tax year.
California does not allow federal bonus depreciation
California requires corporations to recalculate depreciation using standard methods, since it does not conform to bonus depreciation under IRC Section 168(k).
California limits IRC Section 179 expensing
The maximum deduction is capped at $25,000, with a phase-out beginning at $200,000, and must not exceed the corporation’s net income from active business operations.
Approved California depreciation methods
Approved methods include the straight-line method, the declining balance method, and the sum-of-the-years'-digits method, which must be used based on the asset type and its useful life.
Separate federal and state depreciation tracking
Corporations must maintain separate depreciation schedules and reconcile them using Form 4562 and Form 3885 to compute accurate California adjustments.
Special rules for intangibles and research costs
Items subject to IRC Section 174, IRC Section 197, or provisions of the California Revenue and Taxation Code must be amortized using state-specific rules that may differ from federal treatment.
Step-by-Step (High Level)
These steps outline the process of completing Form 3885 (2017), from asset review to California adjustments.
Identify assets requiring adjustments
Corporations must review all business assets placed in service and identify those with depreciation or amortization that differ under California law.
Apply Section 179 limits
Corporations must use California’s Section 179 deduction limit of $25,000 and apply any dollar-for-dollar reductions once the total property placed in service exceeds $200,000.
Compute regular depreciation
Corporations must enter asset details and calculate depreciation using approved methods like straight-line, declining balance, or sum-of-the-years-digits, based on useful life and salvage value.
Calculate depreciation and amortization adjustments
Corporations must compare the federal amounts from Form 4562 to the California calculations on Form 3885 and report any differences as a California adjustment to taxable income.
Complete amortization for intangible assets
Corporations must amortize intangibles such as goodwill or startup costs under IRC Section 197 or applicable California Revenue and Taxation Code provisions.
Attach Form 3885 to the return
Corporations must include Form 3885 with Form 100, Form 100W, or other applicable forms and retain all supporting schedules for review by the California Franchise Tax Board.
Common Mistakes and How to Avoid Them
These frequent errors lead to inaccurate corporate filings; each item below explains how to avoid them.
Claiming bonus depreciation
Corporations should avoid using federal bonus depreciation since California does not allow it and requires recalculation using approved state methods.
Exceeding Section 179 limits
Corporations should verify their eligibility amounts, as California caps IRC Section 179 deductions and applies business income limits that differ from federal rules.
Mixing accelerated depreciation elections
Corporations should not apply both Section 179 and additional state depreciation on the same asset, as California prohibits combining these elections.
Using incorrect useful lives or methods
Corporations should verify functional life categories that match California requirements and confirm use of approved methods such as straight-line or declining balance.
Failing to reconcile federal and California schedules
Corporations should maintain separate records, as differences must be reported as California adjustments on Form 3885.
Misreporting listed property
Corporations must report listed property separately using the proper format to comply with California tracking requirements.
What Happens After You File
Once Form 3885 (2017) is submitted with Form 100 or Form 100W, the California Franchise Tax Board reviews all depreciation and amortization adjustments for consistency. If California depreciation differs from federal amounts, the FTB system verifies these against reported figures on Form 100.
Corporations must maintain detailed schedules, including any carryovers or IRC Section 179 deductions, and ensure that future filings accurately reflect the updated asset basis and accumulated depreciation. In the event of an audit or inquiry, corporations may be required to provide purchase records, depreciation logs, or a Form R Detailed Report to support claims made under California law.
FAQs
Do I need to file Form 3885 (2017) if I already submitted Form 4562 for federal depreciation?
Yes, because Form 4562 does not account for California-specific rules, corporations must still complete Form 3885 (2017) to report depreciation and amortization adjustments for state tax purposes.
Can limited liability companies use Form 3885 for depreciation?
Yes, limited liability companies classified as corporations for tax purposes must file Form 3885 when reporting depreciation or amortization under California’s tax rules.
What is the difference between Form 3885 and Form 3885A?
Form 3885 is used by corporations filing Form 100 or 100W, while Form 3885A is used for individual filers and partnerships reporting similar depreciation and amortization adjustments.
Can I use Form 3885 (2017) to report intangible assets amortized under IRC Section 181?
No, intangible asset amortization under IRC Section 181 is not recognized in California; corporations must use the applicable guidelines from the California Revenue and Taxation Code or IRC Section 197.
Is Form 3885 (2017) required if my corporation files Form 990 or Form CA-199?
No, Form 3885 is only required for corporate income tax returns, such as Form 100. Form 990 and Form CA-199 are informational returns that do not involve depreciation deductions.
