CA 540 Individual Return

What this file is, and what it is not

This file is a content skill that loads on top of us-tax-workflow-base v0.1. It provides the California personal income tax computation rules for a full-year California resident sole proprietor or single-member LLC owner for tax year 2025. It does not provide workflow architecture -- that comes from the base. It does not compute California estimated tax (ca-estimated-tax-540es), SMLLC franchise tax (ca-smllc-form-568), or the individual mandate penalty (ca-form-3853-coverage) -- those are separate content skills.

Tax year coverage. This skill is current for tax year 2025 as of its currency date (April 2026). California did NOT conform to the One Big Beautiful Bill Act (OBBBA, P.L. 119-21) for several key provisions. All OBBBA decoupling points are documented in Section 5. For tax years before 2025, the skill must not be used without explicit verification. For tax years after 2025, bracket thresholds and standard deduction amounts will need updating.

The reviewer is the customer of this output. Per the base, this skill assumes a credentialed reviewer (Enrolled Agent, CPA, or attorney under Circular 230) reviews and signs the return.

Section 1 -- Scope statement

• Covered taxpayers and work — This skill covers California Form 540 (Resident Income Tax Return) for tax year 2025 for taxpayers who are: Full-year California residents, AND Sole proprietors filing federal Schedule C, OR single-member LLCs disregarded for federal tax. For the following kinds of work: Computing California adjusted gross income (CA AGI) from federal AGI using Schedule CA (540); Identifying California additions (add-backs) and subtractions from federal AGI; Applying the nine-bracket California tax rate schedule; Applying the 1% Behavioral Health Services Tax (formerly Mental Health Services Tax / MHST) on taxable income above $1,000,000; Determining standard deduction vs. itemized deductions (California-specific rules); Computing California tax credits (renter's credit, CalEITC, young child tax credit, and others); Computing California Alternative Minimum Tax (AMT) where applicable; Producing the Form 540 worksheet for the reviewer. (https://www.ftb.ca.gov/forms/2025/2025-540-instructions.html)
• Excluded work — This skill does NOT cover: California estimated tax payments -- handled by ca-estimated-tax-540es; Form 568 SMLLC return -- handled by ca-smllc-form-568; Health coverage individual mandate -- handled by ca-form-3853-coverage; Part-year residents or nonresidents (Form 540NR); Multi-state apportionment; Community property adjustments for RDP/same-sex couples (flag for reviewer); Any federal computation -- those are upstream.

Section 2 -- Year coverage and currency

Tax year covered: 2025 (California returns due April 15, 2026, or October 15, 2026 with extension).

Currency date: April 2026.

Legislation reflected:

• California Revenue and Taxation Code (R&TC) as in force for tax year 2025
• SB 78 (2019) -- California individual mandate (Form 3853, handled by companion skill)
• California's conformity position with the Internal Revenue Code as of January 1, 2015, with specified modifications (R&TC section 17024.5)
• FTB Publication 1001 (2025) -- Supplemental Guidelines to California Adjustments
• FTB Form 540 Instructions (2025)
• FTB Schedule CA (540) Instructions (2025)
• FTB 2025 Form 540 instructions and 2025 tax-rate/inflation-adjustment publications

Currency limitations:

• California conformity to the IRC is generally fixed at January 1, 2015 with selective post-2015 conformity enacted by specific California legislation. OBBBA provisions (July 4, 2025) are NOT conformed to unless California enacts separate legislation. As of the currency date, no such legislation has been enacted.
• Some 2025 inflation-adjusted figures (brackets, standard deduction) are based on FTB announcements. Routine 2025 inflation-adjusted figures in this skill are sourced from final FTB 2025 publications; monitor later FTB guidance and legislation before filing.

Section 3 -- Year-specific figures table for tax year 2025

All dollar thresholds, rates, and indexed figures in one place.

Tax rate schedule -- Single and Married/RDP Filing Separately (2025)

Tax rate schedule -- Single and Married/RDP Filing Separately (2025) (https://www.ftb.ca.gov/forms/2025/2025-540-instructions.html)

Bracket	Taxable income range (Single/MFS)	Rate
1	$0 -- $11,079	1%
2	$11,080 -- $26,264	2%
3	$26,265 -- $41,452	4%
4	$41,453 -- $57,542	6%
5	$57,543 -- $72,724	8%
6	$72,725 -- $371,479	9.3%
7	$371,480 -- $445,771	10.3%
8	$445,772 -- $742,953	11.3%
9	$742,954 and above	12.3%
Behavioral Health Services Tax	Above $1,000,000	+1% (13.3% effective marginal)

• MFJ/QSS, HOH, and Behavioral Health Services Tax note — Married/RDP filing jointly and qualifying surviving spouse/RDP brackets generally double the single/MFS schedule, while head of household uses a separate FTB schedule. The $1,000,000 Behavioral Health Services Tax threshold on Form 540 line 62 is statutory and is not doubled for MFJ. (https://www.ftb.ca.gov/forms/2025/2025-540-instructions.html)

Standard deduction (2025)

Standard deduction (2025) (https://www.ftb.ca.gov/forms/2025/2025-540-instructions.html)

Filing status	Standard deduction
Single / MFS	$5,706
MFJ / QSS / HOH / HOH	$11,412

California personal exemption credit (2025)

California personal exemption credit (2025) (https://www.ftb.ca.gov/forms/2025/2025-540-instructions.html)

Filing status	Exemption credit
Single / MFS / HOH	$153
MFJ / QSS	$306
Each dependent	$475

Renter's credit (2025)

Renter's credit (2025) (https://www.ftb.ca.gov/forms/2025/2025-540-instructions.html)

Filing status	Credit amount	CA AGI limit
Single / MFS	$60	$53,994
MFJ / QSS / HOH	$120	$107,988

CalEITC (2025)

CalEITC (2025) (https://www.ftb.ca.gov/file/personal/credits/caleitc/eligibility-and-credit-information.html)

Figure	Value
Maximum earned income	$32,900
Maximum credit (3+ children)	$3,756

Young Child Tax Credit (YCTC) (2025)

Young Child Tax Credit (YCTC) (2025) (https://www.ftb.ca.gov/file/personal/credits/young-child-tax-credit.html)

Figure	Value
Maximum credit per eligible return with a qualifying child under 6	$1,189
Income phaseout	Tied to CalEITC eligibility

California AMT

California AMT (https://www.ftb.ca.gov/forms/2025/2025-540-p-instructions.html)

Figure	Value
AMT rate	7% (flat rate on AMTI less exemption)
Exemption (single / HOH)	$92,749
Exemption (MFJ / QSS)	$123,667
Exemption (MFS)	$61,830
Phaseout thresholds	$347,808 single/HOH; $463,745 MFJ/QSS; $231,868 MFS
Exemption phaseout rate	25% of AMTI above threshold

SDI/VPDI (2025)

SDI/VPDI (2025) (https://www.ftb.ca.gov/forms/2025/2025-540-instructions.html)

Figure	Value
SDI rate	1.2%
SDI taxable wage ceiling	None (uncapped beginning Jan. 1, 2024)
Maximum SDI withholding	No maximum annual withholding
SDI deductibility on CA return	Deductible as itemized deduction (not above-the-line)

Section 4 -- Primary source library

Primary source library

Source	Use
R&TC section 17041	Tax rate schedule
R&TC section 17043	Mental Health Services Tax (1% above $1M)
R&TC section 17024.5	IRC conformity date and modifications
R&TC section 17201 et seq.	Itemized deductions
R&TC section 17052	CalEITC
R&TC section 17052.1	Young Child Tax Credit
R&TC section 17053.5	Renter's credit
R&TC sections 17062, 17063	Standard deduction
R&TC section 17039	Credit limitation (no credit reduces tax below tentative minimum tax)
R&TC sections 17061, 17062	Personal exemption credits
R&TC section 17220	SDI/VPDI deduction
R&TC sections 17750-17756	California AMT
FTB Publication 1001	Supplemental Guidelines to California Adjustments
FTB Publication 1005	Pension and Annuity Guidelines
FTB Form 540 Booklet (2025)	Line-by-line instructions
Schedule CA (540) Instructions (2025)	Addition and subtraction adjustments

Section 5 -- Schedule CA (540): Federal-to-California adjustments

This is the critical section. California starts with federal AGI and adjusts it. Every OBBBA decoupling item must be identified and added back.

5.1 -- California non-conformity with OBBBA (critical)

• Non-conformity framing — California conforms to the IRC generally as of January 1, 2015, with selective updates. California has NOT enacted conformity legislation for OBBBA (P.L. 119-21). The following OBBBA provisions claimed on the federal return must be ADDED BACK on Schedule CA (540).

OBBBA non-conformity table

Federal OBBBA provision	CA treatment	Schedule CA column
100% bonus depreciation for property acquired after Jan 19, 2025 (OBBBA restored §168(k))	CA does not conform. Use pre-OBBBA phase-down (40% for 2025). Add back the excess (60% of the bonus claimed federally).	Column B addition
§174 R&E expensing (if OBBBA modified the TCJA amortization requirement)	CA follows its own R&TC section 17024.5 conformity. If federal allows immediate expensing and CA requires 5-year amortization, add back the difference.	Column B addition
§179 expensing limit increase to $2,500,000 (OBBBA)	CA §179 limit is $25,000 with $200,000 phase-out (R&TC §17255). Add back excess over CA limit.	Column B addition
QBI deduction at 20% (§199A, made permanent by OBBBA)	CA does not allow the QBI deduction. Add back entire federal QBI deduction.	Column B addition
New tip income exclusion (OBBBA)	CA does not conform. Add back any excluded tip income.	Column B addition
New overtime income exclusion (OBBBA)	CA does not conform. Add back any excluded overtime income.	Column B addition
New auto loan interest deduction (OBBBA)	CA does not conform. Add back any deducted auto loan interest.	Column B addition
New senior standard deduction (OBBBA)	CA uses its own standard deduction. No adjustment needed if using CA standard deduction; if using federal itemized and the senior provision affected itemized amounts, reconcile.	Varies

5.2 -- Pre-OBBBA non-conformity items (ongoing)

Pre-OBBBA non-conformity items table (https://www.ftb.ca.gov/forms/2025/2025-3885a-instructions.html)

Federal item	CA treatment
Federal QBI deduction (§199A)	Not allowed in CA. Full add-back.
HSA deduction (§223)	CA does not conform to federal HSA rules. Add back HSA deduction; HSA contributions and earnings are taxable in CA.
Federal bonus depreciation (§168(k)) at rates above CA allowance	Add back excess. California does not conform to IRC §168(k) bonus depreciation; compute separate California depreciation and add back excess federal depreciation.
§179 excess over CA limit ($25,000)	Add back.
SALT deduction cap ($10,000 federal under TCJA, modified by OBBBA)	CA has NO SALT cap. If taxpayer itemizes on CA return, full state/local taxes (other than CA income tax) are deductible. But CA income tax is never deductible on the CA return.
Mortgage interest (federal $750K limit)	CA conforms to $1,000,000 limit (pre-TCJA). If mortgage exceeds $750K but is under $1M, the disallowed federal interest is a CA subtraction.
Net operating loss	CA has its own NOL rules. CA NOL may differ from federal NOL.
Educator expenses	CA generally conforms; confirm if the taxpayer has an unusual fact pattern or later FTB update.
Student loan interest	CA generally conforms; confirm if the taxpayer has an unusual fact pattern or later FTB update.
Moving expenses (military only federally)	CA allows moving expenses for all taxpayers (not just military). Subtraction for non-military movers.

5.3 -- Common subtractions (federal income taxed, CA excludes)

Common subtractions table

Item	CA treatment
Social Security benefits	Not taxable in CA. Subtract any amount included in federal AGI.
Railroad Retirement benefits (Tier 1)	Not taxable in CA. Subtract.
CA lottery winnings	Not taxable in CA. Subtract.
Military pay for active duty outside CA	Subtract under Servicemembers Civil Relief Act.

Section 6 -- Deduction computation

6.1 -- Standard vs. itemized

• Independent election and MFS forced itemization — The taxpayer may choose independently for California. A taxpayer who itemizes federally may take the CA standard deduction, and vice versa. However: If MFS and spouse itemizes, the other spouse MUST also itemize on the CA return (R&TC section 17073.5). CA standard deduction is much lower than federal ($5,706 single/MFS vs. $15,750 federal for 2025). Most self-employed taxpayers with mortgage interest, property tax, or charitable contributions will benefit from itemizing on the CA return. (R&TC section 17073.5)

6.2 -- Itemized deduction differences from federal

Itemized deduction differences from federal table

Deduction	Federal rule	CA rule
State and local income tax	$10,000 SALT cap (TCJA/OBBBA)	Not deductible (cannot deduct CA income tax on CA return). Other states' income tax IS deductible.
Property tax	Subject to $10,000 SALT cap	Fully deductible (no SALT cap in CA)
Mortgage interest	$750,000 acquisition debt limit	$1,000,000 acquisition debt limit (R&TC section 17220)
Home equity interest	Not deductible unless used for acquisition	Same as federal
Charitable contributions	Up to 60% AGI (cash to public charities)	Same as federal (CA conforms)
Medical expenses	Above 7.5% of AGI	Above 7.5% of AGI (CA conforms)
Casualty losses	Only federally declared disasters	CA allows CA-declared disaster losses too
Investment interest	Limited to net investment income	Same as federal
Gambling losses	Limited to gambling winnings	Same as federal
Miscellaneous itemized (2% floor)	Suspended by TCJA through 2025	CA ALLOWS the 2% miscellaneous itemized deduction (CA did not conform to TCJA suspension). Employee business expenses, tax prep fees, etc. are deductible on the CA return subject to 2% AGI floor.

Section 7 -- Tax computation

7.1 -- Regular tax

• Regular tax computation steps — 1. Start with California taxable income (CA AGI minus deductions minus exemption credits basis). 2. Apply the nine-bracket rate schedule from Section 3. 3. Subtract personal exemption credits. 4. Result is regular tax before credits.

7.2 -- Behavioral Health Services Tax (formerly Mental Health Services Tax / MHST)

• Behavioral Health Services Tax computation rule — 1% surcharge on California taxable income exceeding $1,000,000. The $1,000,000 threshold is NOT indexed for inflation. The $1,000,000 threshold is NOT doubled for MFJ. Each spouse's income is NOT measured separately -- it is based on the joint taxable income. Behavioral Health Services Tax is reported on Form 540 line 62. (R&TC section 17043)

7.3 -- California AMT

• California AMT computation steps — California has its own AMT computed on Schedule P (540): 1. Start with California taxable income. 2. Add back AMT preference items (accelerated depreciation, ISO exercises, tax-exempt interest from private activity bonds, etc.). 3. Subtract the AMT exemption (see Section 3). 4. Apply the flat 7% CA AMT rate. 5. AMT = excess of tentative minimum tax over regular tax. 6. AMT is in addition to regular tax and Behavioral Health Services Tax. (https://www.ftb.ca.gov/forms/2025/2025-540-p-instructions.html)
• Key AMT triggers for sole proprietors — Large §179 or depreciation differences (CA §179 limit is $25,000 vs. federal $2,500,000); ISO stock option exercises; Tax-exempt interest from out-of-state private activity bonds.

7.4 -- Tax credits

• Credit ordering and categories — Apply credits in the following order (R&TC section 17039): 1. Nonrefundable credits (reduce tax to zero but not below): Personal exemption credits ($153 single/MFS/HOH, $306 MFJ/QSS, $475 per dependent); Renter's credit ($60 single/MFS; $120 MFJ/QSS/HOH if CA AGI is below the applicable threshold); Child and dependent care credit (CA version); Other nonrefundable credits. 2. Refundable credits (can generate a refund): CalEITC (California Earned Income Tax Credit); Young Child Tax Credit (YCTC); Foster Youth Tax Credit (FYTC). (R&TC section 17039)
• CalEITC notes — Available to taxpayers with earned income from wages or self-employment. Self-employment income DOES qualify for CalEITC (unlike some state EITCs). Must file a CA return to claim even if no CA tax is owed. ITIN filers are eligible (CA allows CalEITC for ITIN filers).

Section 8 -- SDI / VPDI deduction

• SDI/VPDI deduction treatment — SDI (State Disability Insurance) or VPDI (Voluntary Plan Disability Insurance) withheld from wages is deductible as an itemized deduction on the CA return. SDI/VPDI is NOT deductible on the federal return (it is a state tax, subject to SALT cap federally, but on the CA return it gets its own treatment). If the taxpayer takes the CA standard deduction, SDI/VPDI is not separately deductible. For self-employed taxpayers who are also W-2 employees, SDI withheld from the W-2 job flows to Schedule CA as an itemized deduction.

Section 9 -- PROHIBITIONS

• P-540-1 — NEVER apply the federal QBI deduction on the California return. California does not allow §199A. The full QBI amount must be added back on Schedule CA. (P-540-1)
• P-540-2 — NEVER use federal bonus depreciation rates on the California return without adjustment. California's §179 limit is $25,000 (not $2,500,000), and bonus depreciation conformity must be verified against R&TC section 17250. (P-540-2)
• P-540-3 — NEVER assume California conforms to OBBBA. As of the currency date, California has not enacted OBBBA conformity legislation. Every OBBBA-specific federal deduction or exclusion must be evaluated for CA add-back. (P-540-3)
• P-540-4 — NEVER deduct California state income tax as an itemized deduction on the California return. Only other states' income taxes are deductible on Schedule CA. (P-540-4)
• P-540-5 — NEVER double the $1,000,000 Behavioral Health Services Tax threshold for MFJ filers. The threshold is $1,000,000 regardless of filing status. (P-540-5)
• P-540-6 — NEVER exclude HSA contributions or earnings from California income. California does not conform to IRC section 223. HSA contributions are added back, and HSA earnings are taxable in California. (P-540-6)
• P-540-7 — NEVER apply the federal $10,000 SALT cap on the California return. California has no SALT cap for its own itemized deduction computation. (P-540-7)
• P-540-8 — NEVER skip the Schedule CA reconciliation. Every federal-to-California adjustment must be documented and traced. (P-540-8)
• P-540-9 — NEVER compute AMT using the federal AMT rate (26%/28%). California AMT is a flat 7%. (P-540-9)
• P-540-10 — NEVER exclude Social Security benefits from the CA subtraction analysis. Social Security is fully exempt from CA tax and must be subtracted from federal AGI on Schedule CA. (P-540-10)

Section 10 -- Edge Cases

EC-540-1 -- Taxpayer with large OBBBA bonus depreciation claim

Situation: Sole proprietor purchased $200,000 of equipment on March 1, 2025 and claimed 100% bonus depreciation ($200,000) on the federal return under OBBBA-restored §168(k).

Resolution:

• Federal deduction: $200,000 (100% bonus).
• CA does not conform to federal IRC §168(k) bonus depreciation; compute California depreciation separately on FTB 3885A using California basis/recovery rules.
• Schedule CA addition equals the excess federal depreciation over the California depreciation allowed for 2025.
• Track the California basis and future depreciation difference on FTB 3885A / Schedule CA support.
• Do not apply a California bonus-depreciation percentage unless a California-specific rule applies; default to no IRC §168(k) bonus conformity.

EC-540-2 -- High-income freelancer triggers Behavioral Health Services Tax

Situation: Single filer with CA taxable income of $1,200,000.

Resolution:

• Regular tax computed on nine brackets through 12.3%.
• Behavioral Health Services Tax: 1% x ($1,200,000 - $1,000,000) = $2,000.
• Total marginal rate on income above $1M = 13.3%.
• The 2025 Form 540 line 62 worksheet uses the statutory $1,000,000 threshold.

EC-540-3 -- MFJ couple with combined income just over $1M Behavioral Health Services Tax threshold

Situation: MFJ with combined CA taxable income of $1,050,000. One spouse earns $900,000, the other $150,000.

Resolution:

• Behavioral Health Services Tax applies based on JOINT taxable income, not per-spouse.
• Behavioral Health Services Tax = 1% x ($1,050,000 - $1,000,000) = $500.
• The threshold is NOT doubled to $2,000,000 for MFJ.
• Flag for reviewer: Taxpayers near the $1M threshold should consider timing strategies (accelerate deductions, defer income).

EC-540-4 -- HSA contributions add-back

Situation: Taxpayer contributed $4,300 to an HSA and deducted it on federal Form 1040 Line 13 (via Schedule 1).

Resolution:

• CA does not recognize HSAs. Add back $4,300 on Schedule CA Column B.
• HSA earnings (interest, dividends, capital gains inside the HSA) are also taxable in CA.
• Distributions for medical expenses: taxable in CA unless the expense was not already deducted.
• Flag for reviewer: Request HSA 1099-SA and 5498-SA to compute CA HSA income.

EC-540-5 -- Mortgage interest difference ($750K vs $1M)

Situation: Taxpayer has a $900,000 mortgage (acquisition debt, pre-TCJA grandfathering does not apply). Federal deduction limited to interest on $750,000. CA allows interest on up to $1,000,000.

Resolution:

• Federal allowed: interest on $750,000 of the $900,000 mortgage.
• CA allowed: interest on $900,000 (under the $1M limit).
• Schedule CA subtraction: the disallowed federal interest (interest allocable to the $150,000 excess).
• Flag for reviewer: Calculate the exact pro-rata interest allocation.

EC-540-6 -- Sole proprietor eligible for CalEITC

Situation: Low-income sole proprietor with $25,000 net self-employment income, no W-2 wages, single filer.

Resolution:

• CalEITC is available for self-employment income (net earnings from self-employment).
• Must have earned income within the 2025 CalEITC range (up to $32,900).
• ITIN filers qualify.
• CalEITC is refundable -- taxpayer may owe zero CA tax and still receive the credit.
• Also check eligibility for Young Child Tax Credit if taxpayer has a child under 6.
• Flag for reviewer: Verify earned income computation for CalEITC matches Schedule C net profit.

EC-540-7 -- 2% miscellaneous itemized deductions (CA allows, federal does not)

Situation: Taxpayer has $3,000 in unreimbursed employee business expenses (from a side W-2 job) and $1,500 in tax preparation fees. Federal AGI is $80,000.

Resolution:

• Federal: $0 deduction (TCJA suspended 2% miscellaneous itemized through 2025, and OBBBA did not restore).
• CA: 2% floor = $80,000 x 2% = $1,600. Total miscellaneous = $4,500. Deductible on CA = $4,500 - $1,600 = $2,900.
• Schedule CA subtraction: $2,900.
• Flag for reviewer: Verify that OBBBA did not change the federal suspension of 2% miscellaneous itemized deductions.

EC-540-8 -- Social Security recipient with self-employment income

Situation: Taxpayer receives $18,000 in Social Security benefits (included in federal AGI per the 85% rule) and has $50,000 Schedule C net profit.

Resolution:

• Federal AGI includes up to 85% of Social Security = $15,300.
• CA: Social Security is 100% exempt. Subtract $15,300 on Schedule CA Column C.
• CA AGI = Federal AGI minus $15,300 (plus any other adjustments).
• Flag for reviewer: Confirm exact amount of Social Security included in federal AGI.

EC-540-9 -- Taxpayer claims federal standard deduction but CA itemized is better

Situation: Single filer takes the federal standard deduction ($15,000) but has $8,000 in property taxes, $6,000 in mortgage interest, and $2,000 in charitable contributions.

Resolution:

• Federal: standard deduction is higher ($15,000 > $16,000 itemized less SALT cap complications).
• CA standard deduction: only $5,706.
• CA itemized: $8,000 property tax (fully deductible, no SALT cap) + $6,000 mortgage + $2,000 charitable = $16,000.
• Taxpayer should itemize on CA return ($16,000 > $5,706).
• The election is independent -- taxpayer CAN take federal standard and CA itemized.
• Flag for reviewer: Confirm independent election is optimal.

Section 11 -- Test Suite

Test 540-1 -- Basic single filer, no OBBBA complications

Input: Single, CA resident, federal AGI $85,000. No QBI. No bonus depreciation. No HSA. Standard deduction on CA return. Expected: CA AGI = $85,000. CA taxable income = $85,000 - $5,706 = $79,294. Tax computed using brackets 1-6; tentative regular tax is about $3,812.98 and the $153 personal exemption credit reduces it to about $3,659.98. No Behavioral Health Services Tax (under $1M).

Test 540-2 -- QBI add-back

Input: Single, CA resident, federal AGI $120,000 after $20,000 QBI deduction. Actual Schedule C net profit = $100,000. Expected: Federal AGI includes QBI deduction reducing taxable income, but CA AGI must add back the $20,000 QBI deduction on Schedule CA. CA AGI = federal AGI + $20,000 QBI add-back. (Note: QBI deduction is below-the-line federally on Line 13, so it does not affect federal AGI. The add-back occurs on the CA taxable income computation, not AGI.)

Test 540-3 -- Behavioral Health Services Tax computation

Input: Single, CA taxable income = $1,500,000. Expected: Regular tax on $1,500,000 using nine brackets. Behavioral Health Services Tax = 1% x ($1,500,000 - $1,000,000) = $5,000. Total tax = regular tax + $5,000 Behavioral Health Services Tax.

Test 540-4 -- HSA add-back plus SDI deduction

Input: Single, W-2 employee with side Schedule C. Federal AGI includes $4,300 HSA deduction. SDI withheld $1,684.80. Itemizing on CA return. Expected: Add back $4,300 HSA on Schedule CA. SDI of $1,684.80 included in CA itemized deductions. Net CA AGI adjustment = +$4,300. Itemized deductions include SDI.

Test 540-5 -- CalEITC with self-employment income

Input: Single, net self-employment income $22,000. One qualifying child age 4. No W-2 wages. ITIN filer. Expected: Eligible for CalEITC based on $22,000 earned income. Eligible for Young Child Tax Credit (child under 6). Both credits are refundable. CA tax liability may be $0 with refundable credits generating a refund. ITIN status does not disqualify.

Test 540-6 -- Independent deduction election (federal standard, CA itemized)

Input: Single, federal AGI $95,000. Takes federal standard deduction ($15,000). Has $9,000 property tax, $7,000 mortgage interest, $3,000 charitable. Expected: CA standard deduction = $5,706. CA itemized = $9,000 + $7,000 + $3,000 = $19,000 (no SALT cap, no CA income tax deduction needed). Taxpayer should itemize on CA ($19,000 > $5,706). Federal and CA elections are independent.

Test 540-7 -- Large §179 difference

Input: Single, claimed $500,000 §179 on federal return (within federal $2,500,000 limit). Equipment cost $500,000. Expected: CA §179 limit = $25,000. Add back $475,000 on Schedule CA. CA must depreciate the remaining $475,000 using regular MACRS over the applicable recovery period. Track CA basis adjustment going forward.

Section 12 -- Self-checks

Check 200 -- Federal AGI flows to Schedule CA. Verify that federal AGI on Schedule CA Line 37 matches the federal Form 1040 Line 11.

Check 201 -- Every OBBBA add-back is documented. For each OBBBA provision used on the federal return, verify a corresponding Schedule CA addition exists.

Check 202 -- QBI deduction is added back. If federal return claims QBI (Form 8995 or 8995-A), verify the full amount is added back on the CA return.

Check 203 -- HSA add-back present if applicable. If federal return includes an HSA deduction, verify it is added back on Schedule CA.

Check 204 -- Behavioral Health Services Tax computed if taxable income exceeds $1M. If CA taxable income > $1,000,000, verify Behavioral Health Services Tax of 1% on excess is included.

Check 205 -- Standard vs. itemized deduction is optimal. Verify the chosen deduction method produces the lower CA tax. Document if MFS forced itemization applies.

Check 206 -- Social Security subtracted. If federal AGI includes Social Security, verify it is subtracted on Schedule CA.

Check 207 -- §179 and depreciation differences tracked. If federal §179 or bonus depreciation exceeds CA limits, verify the add-back and the future-year CA depreciation schedule.

Check 208 -- CalEITC and YCTC evaluated. If CA earned income is within CalEITC range, verify credit was computed. If qualifying child under 6, verify YCTC.

Check 209 -- CA AMT evaluated. If large depreciation differences, ISO exercises, or private activity bond interest exist, verify Schedule P (540) was completed.

Check 210 -- Filing status matches federal. Verify CA filing status matches federal filing status (with limited exceptions for RDP).

Section 13 -- Cross-skill references

Inputs from:

• us-federal-return-assembly -- federal AGI, federal tax, all federal positions
• us-sole-prop-bookkeeping -- Schedule C line items
• us-schedule-c-and-se-computation -- Schedule C net profit, depreciation details
• us-qbi-deduction -- QBI deduction amount for add-back
• us-self-employed-health-insurance -- SE health insurance deduction
• us-self-employed-retirement -- retirement contribution deduction

Outputs to:

• ca-estimated-tax-540es -- CA total tax for safe harbor computation
• ca-form-3853-coverage -- CA AGI for penalty computation
• us-ca-return-assembly -- Form 540 worksheet for final package

Section 14 -- Known gaps

1. Part-year and nonresident returns (Form 540NR) are not supported.
2. Community property rules for RDP/same-sex couples require reviewer judgment.
3. California NOL carryforward/carryback rules are not fully detailed; flag for reviewer if taxpayer has prior-year CA NOLs.
4. Specific CA disaster loss rules beyond general casualty loss are not covered.
5. California legislative response to OBBBA may change before the filing deadline; monitor FTB announcements.

Change log

v0.1 (April 2026): Stub. v0.2 (April 2026): Full content skill with Schedule CA adjustments, OBBBA decoupling, brackets, credits, AMT, edge cases, and test suite.

End of skill

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