Fixed Asset Review & California Depreciation Planning 2026 – A Q3 Checklist for Business Owners

The third quarter occupies a useful position in the tax year. Enough of the year has elapsed that capital expenditures, dispositions, and placed-in-service dates are largely known, yet sufficient time remains before December 31 to organize records, reconcile schedules, and model the effect of remaining decisions. For businesses that carry meaningful fixed assets, a mid-year fixed asset review is a common way to reduce the reconciliation burden that typically accumulates at year-end. This article outlines the general components of a Q3 fixed asset review and the California depreciation considerations that frequently accompany it. The discussion is educational and general in nature and does not address any taxpayer's specific facts.

1. Why Q3 Is a Practical Window for Fixed Asset Review

A fixed asset review is the process of confirming that the assets recorded on the books physically exist, are correctly classified, are depreciating on the appropriate schedules, and are supported by adequate documentation. Conducting this review in the third quarter offers a general advantage: capital activity from the first three quarters can be examined while it is still recent, and any errors can be corrected before they compound into the year-end close.

A typical Q3 review addresses several categories at once. It reconciles the subsidiary fixed asset ledger to the general ledger, verifies that current-year additions have been capitalized correctly under the applicable capitalization policy, confirms that disposed or retired assets have been removed, and checks that depreciation methods, useful lives, and conventions remain consistent with prior filings. Because year-end fixed asset planning often involves elections that must be finalized by December 31, an early review preserves flexibility to model alternatives.

2. A Practical Q3 Fixed Asset Checklist

The following items reflect components commonly examined during a mid-year review. Each item is general and educational and is framed as an area of review rather than as advice:

• Ledger-to-GL reconciliation: agreement of the fixed asset subledger to the general ledger control accounts for both cost and accumulated depreciation.
• Physical existence: confirmation that recorded assets remain in service, and identification of ghost assets (items still on the books that have been scrapped, sold, or lost).
• Capitalization thresholds: consistency of current-year purchases with the written capitalization policy and the de minimis safe harbor under Reg. §1.263(a)-1(f), where applicable.
• Classification and useful life: review of asset categories, MACRS recovery periods, and conventions for accuracy.
• Additions documentation: capture of invoices, placed-in-service dates, and cost basis (including freight and installation) for each addition.
• Dispositions: removal of sold, retired, or abandoned assets, with identification of any gain, loss, or depreciation recapture.
• Repairs vs. improvements: evaluation of significant expenditures against the tangible property regulations.

3. Additions, Dispositions, and Placed-in-Service Timing

The placed-in-service date generally determines the year in which depreciation begins, and it can also affect the applicable convention. Assets acquired but not yet placed in service before year-end are generally not eligible for current-year depreciation. Dispositions warrant equal attention: the removal of an asset can generate a gain, loss, or depreciation recapture under IRC §1245 or §1250, and accurate records support the correct computation on federal Form 4562 and, where relevant, Form 4797.

4. California Nonconformity: Bonus Depreciation and Section 179

For California businesses, the fixed asset review carries an additional layer. California conforms to the Internal Revenue Code only as of a fixed date and requires affirmative state legislation to adopt later federal changes. As of mid-2026, California remains selectively nonconforming on several key depreciation provisions.

Federal law continues to allow first-year bonus depreciation for qualified property placed in service in 2026, subject to any phase-down schedule enacted by Congress. California does not conform to federal bonus depreciation. California generally requires depreciation under MACRS without the additional first-year bonus percentage, which produces a permanent book-to-California timing difference in the year of acquisition and offsetting differences in later years.

Section 179 expensing is also subject to California-specific limitations. The federal dollar limit and investment phase-out threshold are substantially higher than the California amounts. California generally applies a $25,000 maximum Section 179 deduction with a $200,000 investment phase-out threshold, per FTB guidance — figures that differ materially from the federal limits. As a result, an asset fully expensed for federal purposes may be only partially expensed, or fully capitalized, for California purposes.

5. Maintaining Separate Federal and California Schedules

The practical consequence of nonconformity is that many California businesses carry two depreciation schedules for the same assets — one computed on the federal basis and one computed on the California basis. Federal depreciation is reported on Form 4562. California depreciation for most entities is reported on the FTB 3885 series (for example, FTB 3885A for individuals and FTB 3885 for corporations), and the resulting differences flow through as additions or subtractions on Schedule CA (540) or the corresponding business schedules.

Organizing these parallel schedules during Q3 allows the California adjustment to be projected before year-end rather than reconstructed during filing season. It also supports an accurate mid-year California taxable-income estimate, which is relevant for taxpayers evaluating estimated-tax safe harbors on the California return.

Compliance Resources and Tools

Authoritative guidance on federal and California depreciation is contained in publicly available official resources, including:

• IRS Publication 946, How To Depreciate Property (federal MACRS, bonus, and Section 179 rules).
• IRS instructions for Form 4562, Depreciation and Amortization.
• FTB Publication 1001, Supplemental Guidelines to California Adjustments.
• FTB 3885 series instructions (state depreciation and amortization).
• Treasury Regulations under §1.263(a) governing capitalization and the de minimis safe harbor.

These publications are available free of charge on irs.gov and ftb.ca.gov and contain the complete rules and current-year figures. For related concepts, see Mid-Year Tax Check-Up 2026 – A Strategic Guide for Business Owners and Bookkeeping Cleanup Before Year-End 2026.