Intangible drilling cost in California

[Nhanda]

I entered K-1 for intangible drilling cost (loss entered as deduction). Turbo Tax has applied the deduction to both Federal and California state returns. From 2024, California does not allow intangible drilling cost deduction but Turbo Tax seems to have applied it for California as well. Can someone help on how to handle intangible drilling cost deduction for California ?

[Nhanda]

As per https://www.ftb.ca.gov/forms/2024/2024-3510-instructions.html#:~:text=Intangible%20Drilling%20and%20...). , California does not allow intangible drilling cost expense in 2024 but Federal return allows it. How to handle this in Turbo Tax with the California return? Turbo Tax is taking the federal taxable amount (reduced by intangible drilling cost) in California as well which seems incorrect.

[Nhanda]

I also hear that the expense can be amortized in CA for 5 years. Can this be handled in Turbo Tax ? I understand there is a live tax expert feature and if that helps in this case.

[PatriciaV]

To eliminate intangible drilling costs reported on Schedule K-1, you will need to manually adjust Line 13d under the California K-1 adjustments topic. Find this from the page "Here's the income that California handles differently" under Business >> Partnership K-1.

The Federal column displays the full amount you deducted on your federal return. Enter zero in the California column for Line 13d and on Line 17f.

If IDC is reported to you in the future, you will need to make this adjustment each year.

[edited 4/15/25 | 12:46 pm PDT]

[Nhanda]

Updating the California Amount in 13d is the first thing I tried. Updating 13d in California Amount has no effect at all. If I put in a 0 or 10 million, it has no effect. I showed the same problem to Live Agent yesterday who spent two hours with me.

Updating 17f (4) for California Amount also has no effect. It does not have any effect whatsoever on whatever amount you enter.

This seems like a bug in the Turbo Tax software that needs to be fixed.

[Nhanda]

Turbo Tax team,

Am I going to get a software fix for the problem in California state tax return?

I need to file the return ASAP.

i am using Turbo Tax Premier 2024 in Windows desktop.

[PatriciaV]

Your best option at this point is to request an extension of time to file as an update for this form is unlikely before the filing deadline. See: How do I file an extension for my personal state taxes?

To submit this for further investigation, it would be helpful to have a TurboTax ".tax2024" file that is experiencing this issue.

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, please follow these instructions: 

In TurboTax Online, open your return, go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools.
2. A window will pop up which says Tools Center.
3. On this screen, select Share my file with Agent.
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number.
5. You may wish to snap a screenshot to post instead of the actual number.
6. Reply to this thread with your Token number (including the dash) and tag (@) the Expert requesting the token from you.
7. Please include any States that are part of your return - this is VERY important.

In TurboTax Desktop, open your return and go to Online in the TurboTax header. (On a Mac computer, choose Share or Help.)

1. Choose Send Tax File to Agent.
2. You will see a message explaining what the diagnostic copy is.  Click Send on this screen and wait for the Token number to appear.
3. Reply to this thread with a screenshot of your Token number (this avoids Community filters for numbers with a dash) and tag (@) the Expert requesting the token from you.
4. Please include any States that are part of your return - this is VERY important.

We will then be able to confirm the experience you are having. If we find a better resolution, we'll reply here.

[PatriciaV]

This experience has been investigated. Here are the steps to report the IDC adjustment on your California return.

1. Go to Income that California handles differently >> Partnership K-1.
2. Edit the K-1 that has IDC.
3. Enter a zero on Lines 13d and 17f.
4. Continue back to the California return summary page.

[edited 4/15/25 | 12:54 pm PDT]

[Nhanda]

Hi PatriciaV -

IDC in my case is for oil wells. California allows IDC deduction only for geothermal wells. So AMT is not applicable in my case. 

In addition to K-1, I will add an income adjustment on California Schedule CA so that IDC deduction from 1040 is not included in California return.

Thanks!

[PatriciaV]

Enter a zero to remove IDC from your California return.

[edited 4/15/25 | 12:55 pm PDT]

[kashyapvijay]

Effective January 01, 2024, California does not allow IDC deduction - neither in one (first) year, nor amortized over 5 years or any other period. Is this not correct? Could you please clarify your suggestion? Thanks. 

[Nhanda]

Yes, is not allowed in California anymore starting 2024. Turbo tax does not handle the new California law for IDC oil and gas wells. You will have to make a manual adjustment to add the federal IDC deduction as an income in California return. This is what I did to be compliant with the new California law.

[kashyapvijay]

Thanks Nhanda for your quick response. My Oil exploration investment schedule K-1 has two important amounts - (i) Business Loss, and (ii) Intangible Drilling Cost (IDC). Federal tax allowed deduction for both these amount combined. To California, do I only need to adjust California  Schedule CA 540 for line item for Partnership only only for IDC or do I need to also combine Business Loss also reported by the Partnership? I will very much appreciate your help in clarifying this. Yesterday only I paid Turbo Tax Premier Online version and State E-file and filed my returns, which has been accepted by Fed as well as California but Turbo Tax generated California return is incorrect and I need to pay for the difference today and file amended California return to avoid penalty and interest charges.

[Nhanda]

As per California FTB, Intangible Drilling and Development Costs (IDCs) are not allowed to be taken as a deduction.

There is no mention of Business loss in the new rule which means it not affected by the new rule.

[kashyapvijay]

How did you make change manually? Turbotax premier online version only let answer questions to prepare the tax forms even for amendment. It doesn't allow editing of generated tax forms.