California doesn’t follow federal bonus depreciation — what that means for your cost seg study

Here is the mistake I see on California returns more than any other in this area: a property owner does a cost segregation study, the federal benefit is enormous thanks to 100% bonus depreciation, and the preparer copies those same numbers onto the California return. The California return is now wrong — sometimes by hundreds of thousands of dollars of overstated deductions — because California does not follow the federal depreciation rules. Not partially. On bonus depreciation, not at all.

What California does and doesn’t allow

Bonus depreciation: disallowed, entirely. The federal government, through the One Big Beautiful Bill Act, made 100% bonus depreciation permanent in 2025. California never conformed to bonus depreciation and still doesn’t — the state’s most recent conformity update specifically excluded the OBBBA changes. For your California return, you must add back every dollar of bonus depreciation you claimed federally.

Section 179: capped at $25,000. Federally, Section 179 expensing runs into the millions. California caps it at $25,000, with the benefit phasing out once you place more than $200,000 of qualifying property in service — which most cost-seg properties blow past immediately. So 179 rarely rescues the California side either.

So does cost segregation even help in California? Yes — just differently

This is the part people miss in the other direction, and it’s the more important point. California does follow the underlying reclassification. When a study moves a component from 39-year property into a 5-, 7-, or 15-year class, California recognizes that shorter recovery period and lets you depreciate it on the faster MACRS schedule. You simply don’t get the bonus depreciation kicker on top.

In plain terms: federally, a reclassified $400,000 of components might be deducted almost entirely in year one. In California, that same $400,000 is deducted over 5, 7, and 15 years on an accelerated schedule — faster than 39 years, just not all at once. The benefit is real and meaningful; it’s a timing difference, not a disqualification. A study is still very much worth doing for a California owner — you just need someone who computes the two tracks separately.

What this means in practice

It means your federal and California depreciation will diverge for the life of the property, and you’ll carry a book/state difference every year until the schedules converge. It means your California taxable income will be higher than your federal taxable income in the early years — so the cash-flow win is mostly a federal one up front, with California catching up over time. And it means whoever prepares your return has to maintain two depreciation schedules, not one.

There are second-order effects too. California suspends net operating loss deductions for businesses with over $1 million of taxable income through 2026, which can trap a big state deduction. And when you sell, the federal and California basis differ — so the gain calculations differ, and California taxes the whole gain as ordinary income at rates up to 13.3%. None of this kills the strategy; all of it has to be modeled before you spend money on a study.

The bottom line for California owners

Cost segregation is still one of the most powerful tools available to California real estate owners — the federal benefit alone usually justifies it many times over. But the headline national figures you read about bonus depreciation simply do not apply to your state return, and a study run by someone who doesn’t separate the two tracks will produce a federal win and a California-sized problem. The value here isn’t just the study; it’s the return that’s actually correct in both jurisdictions.