In the most recent version of Tax News, the California Franchise Tax Board (FTB) announced that California follows the federal "repair regulations," which provide rules for distinguishing capital expenditures from deductible supply, repair, and maintenance costs. As the FTB noted, California conforms to the federal Internal Revenue Code (IRC) as enacted on January 1, 2009, and any regulations for the IRC as in effect on January 1, 2009, are applicable as FTB regulations unless they conflict with a provision of the California Revenue & Taxation Code or a FTB regulation.
One issue that may arise with regard to the repair regulations is that there may be a difference between the federal and California depreciable basis, useful life, or method of depreciation. If a taxpayer submits a request to change an accounting method for federal tax purposes and the IRS approves the request, the change will also apply for California purposes, so long as California law has conformed to or is substantially similar to the underlying law that is being applied. Therefore, to the extent that the FTB follows the federal provision for which a federal approval for a change in accounting method was granted, the federal approval will still apply for California purposes, even though the resulting federal numbers may be different than the California numbers. In cases where there is a federal/California difference, taxpayers should attach to their California tax return both a copy of the federal Form 3115 (Application for Change in Accounting Method) and a pro forma Form 3115 with the numbers adjusted for California.
Finally, the FTB noted that California will follow IRS Revenue Procedure 2015-20, which allows qualifying small businesses to apply certain repair regulations on a prospective basis without the need to file Form 3115.