It’s not uncommon for taxpayers to reach out to me asking whether they are filing their California tax return correctly, especially when it comes to deductions. Many people assume that because they filed their federal tax return with no problems that their California tax will be the same. That’s not necessarily the case. Filing a California tax return can be complex, especially when it comes to deductions. And those deduction mistakes can trigger Franchise Tax Board (FTB) notices, audits, penalties or simply result in paying more tax than necessary. Here’s a look at some of the most common deduction errors taxpayers and business owners make on California tax returns.
Charitable Contribution Mistakes — Taxpayers may make mistakes when it commons to these deductions. This includes donating to organizations that are not qualified charities under California law, over-estimating the value of non-cash donations, and failing to keep receipts and written acknowledgements of donations.
Incorrect Home Office Deductions — Many individuals, especially those that work from home, will write off the portion of their home that serves as an office. This is allowed under federal and California law. However, some taxpayers may claim space that is not used exclusively for business. Overestimating square footage is another common mistake as well as deducting home expenses that do not qualify for the home office deduction. That includes certain home improvements.
Taking the Itemized vs. Standard Deduction — California’s standard deduction amounts differ from federal amounts. Taxpayers may not itemize deductions for the federal return because it’s a higher threshold. However, the amount is considerably lower for California and, as such, itemizing may be the better solution for the California tax return.
Business Expense Deduction Errors — Business deductions can be a big audit trigger for the California Franchise Tax Bureau. Some common errors that occur include deducting personal expenses as business costs, not calculating vehicle expenses correctly, and misapplying meal deduction limits.
Retirement Contribution Deductions — Taxpayers sometimes deduct contributions that are not deductible in California or exceed allowable limits. This is especially common with certain IRAs, health savings accounts, and employer-sponsored plans.
There are many ways to avoid making deduction errors on your California tax return. First and foremost, work with an experienced tax professional who understands California’s tax laws and requirements. If you are a business owner, make sure to review California-specific tax rules each year. If you use tax software (e.g. TurboTax), make sure to review the state questions and tax section and do not assume the federal deductions automatically apply to California. Finally, always keep organized and thorough documentation of your receipts and tax records.
Deduction errors on California tax returns are common, but they are also preventable. As with all tax issues, I always urge business owners and tax payers to work with an experienced tax professional or California tax attorney to make sure you are not making deduction errors on your California tax return.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
