What Form 3885 (2018) Is For
Form 3885 (2018), Corporation Depreciation and Amortization, is used by California corporations to calculate depreciation and amortization deductions under California tax law. Since the state does not conform to many changes in federal law made after January 1, 2015, this form ensures that corporations apply California-specific depreciation limits, methods, and elections.
It adjusts taxable income reported on Form 100 or Form 100W by replacing federal depreciation figures with allowable state amounts for depreciable property and intangible assets.
When You’d Use Form 3885 (2018)
Corporations should use Form 3885 (2018) in several situations where California depreciation calculations are necessary.
Original return requirement
Corporations must file Form 3885 (2018) if their California depreciation differs from the federal depreciation amounts as reported on their tax return.
New asset acquisitions
You’ll need this form when your business entity places qualified property or intangible assets into service during the 2018 tax year.
IRC Section 179 or additional depreciation elections
If you make an expense deduction election under IRC Section 179 or opt for California’s additional first-year depreciation, Form 3885 must be attached to reflect that choice.
Late return situations
Even when filing after the deadline, Form 3885 (2018) is required to report regular depreciation, though you can no longer make depreciation-related elections.
Amended returns
If a previously filed return includes errors in depreciation methods, useful lives, or omitted assets, Form 3885 must accompany Form 100X to correct those issues.
Key Rules or Details for 2018
California’s depreciation rules for 2018 include several vital differences from federal law that corporations must observe.
California conformity to federal law
California conforms to the Internal Revenue Code only through January 1, 2015, and therefore does not recognize federal changes, such as expanded bonus depreciation or increased Section 179 limits.
IRC Section 179 limits
For 2018, corporations can deduct up to $25,000 under IRC Section 179, with the deduction phased out once total qualifying property placed in service exceeds $200,000.
Additional first-year depreciation
California offers a state-specific election allowing up to $2,000 to be deducted in the acquisition year for qualified property with a useful life of six years or more.
Depreciation limits on luxury vehicles
California imposes strict annual caps on depreciation for passenger vehicles, limiting deductions regardless of depreciation method or business use percentage.
Ineligible property types
Real property, structural components, and listed property, such as peripheral equipment used 50% or less for business purposes, are not eligible for accelerated depreciation or Section 179 expensing.
Amortization rules
Intangible assets must be amortized in accordance with California's Revenue and Taxation Code, using the straight-line method and adhering to asset-specific rules outlined in FTB publications and supplemental guidelines, such as FTB 3580.
Step-by-Step (High Level)
To complete Form 3885 (2018) accurately, corporations should follow these general steps.
Gather documentation
Begin by collecting records for all depreciable property and intangible assets, including acquisition dates, original costs, prior depreciation, depreciation methods, and useful lives used under both federal and California rules.
Make Section 179 decision
Evaluate whether to elect the IRC Section 179 expense deduction up to $25,000 or opt for California’s additional first-year depreciation, since only one may be used per year.
Calculate regular depreciation
Use California-approved depreciation methods such as the straight-line method or balance method, and apply them to the appropriate classes of assets placed in service during 2018.
Compute adjustments
Compare California depreciation totals to those reported on federal Form 4562, then calculate any difference as an addition or subtraction adjustment to be reported on Form 100.
Amortize intangible assets
Complete Part IV for intangible assets by entering the relevant Revenue and Taxation Code section, amortization period, and current-year deduction using California’s straight-line requirements.
Transfer to Form 100 or 100W
Use the calculated amounts from Form 3885 (2018) to complete line items on Form 100 or Form 100W, ensuring that all depreciation and amortization differences are correctly reflected.
Common Mistakes and How to Avoid Them
Several common errors occur when filing Form 3885 (2018); avoiding them can help reduce audit risk and ensure correct tax reporting.
Using federal depreciation figures
Always use California-specific depreciation rules from FTB 3885 to prevent reporting errors and avoid discrepancies in state filings.
Claiming excess Section 179 deductions
Never claim more than California’s $25,000 Section 179 limit, and always apply the phase-out rules when qualifying property exceeds $200,000.
Double electing first-year depreciation
You cannot claim both IRC Section 179 and California’s additional first-year depreciation for the same asset in the same year.
Ignoring limits on luxury autos
Be sure to apply California’s depreciation caps on passenger automobiles, which remain lower than federal limits regardless of the vehicle’s business use.
Not amortizing intangible assets
Do not overlook amortization entries for intangible assets such as goodwill or startup costs, which require specific treatment under the Revenue and Taxation Code.
Skipping basis adjustments
Maintain separate depreciation schedules for California and federal purposes so that gain or loss calculations reflect the correct adjusted basis when assets are sold.
What Happens After You File
Once Form 3885 (2018) is filed with your California corporation tax return, the Franchise Tax Board reviews your depreciation and amortization entries for mathematical accuracy and conformity to California rules. The data from this form carries over into future tax years, affecting depreciation deductions and asset basis until the asset is thoroughly disposed of. If the FTB finds discrepancies or omissions, it may initiate a correspondence or field audit.
FAQs
Do I need Form 3885 (2018) if I already completed federal depreciation forms?
Yes, even if you filed federal depreciation using Form 4562, California requires Form 3885 (2018) to reflect state-specific rules and limitations not recognized under federal law.
Are all types of business assets eligible for depreciation on Form 3885 (2018)?
No, only depreciable property, such as tangible property used in business, is eligible, and certain assets like real estate, structural components, and property acquired from related parties are excluded.
Can intangible assets be amortized using accelerated methods in the state of California?
No, intangible assets must follow California’s straight-line method for amortization, as outlined in the applicable Revenue and Taxation Code sections.
Does California allow full depreciation for all business-use vehicles?
No, California enforces limitations on luxury automobiles and applies strict annual caps regardless of the vehicle’s cost or business use percentage.
What are the official resources for additional guidance on depreciation?
Corporations can refer to FTB Pub 100, the Supplemental Guidelines to FTB 3885, and Form FTB 3580 for detailed rules on asset treatment, depreciation methods, and business income limitations.
