Can a taxpayer use the installment method for California but not for federal tax purposes?
Edvin Givargis Published 10 minute read
The short answer
Yes, within a specific and fairly narrow lane. California generally requires a taxpayer's elections to match the federal elections, but Revenue and Taxation Code sections 17024.5(e) and 23051.5(e) allow a taxpayer to obtain different California treatment by filing a separate election with the Franchise Tax Board, and the installment method is one of the places that separate election is workable in practice. A taxpayer who elects out of the installment method for federal purposes under Internal Revenue Code section 453(d), reporting the full gain on Schedule D in the year of sale, can still report that same sale on the installment method for California by completing Form 3805E and carrying the resulting difference through Schedule CA. The mechanism is not a change in accounting method in the sense that triggers the Franchise Tax Board's Form 3115 procedure under FTB Notice 2020-04. Electing in or out of the installment method under section 453(d) is a transaction-specific election, not a change in the taxpayer's overall method of accounting, and California's separate-election statute reaches it on its own terms.
The conformity baseline: elections follow federal, unless a separate one is filed
California's starting position on accounting methods and elections is conformity. Revenue and Taxation Code section 17024.5(e)(1), for personal income tax, and section 23051.5(e)(1), for corporation tax, both provide that a proper election filed with the Internal Revenue Service is deemed to be a proper election for California purposes as well, unless the statute or a Franchise Tax Board regulation provides otherwise. That deeming rule is why most taxpayers never think about accounting methods as a state issue at all: whatever gets elected on the federal return simply carries over.
The same subdivision then opens the door the other way. Section 17024.5(e)(3)(A) and its corporate counterpart, section 23051.5(e)(3)(A), state that a taxpayer may obtain treatment different from what was elected federally by filing a separate election, at the time and in the manner the Franchise Tax Board requires. A further carve-out in subdivision (e)(3)(B) limits separate elections in a narrower situation, involving an election a taxpayer made before becoming subject to California tax in the first place, and does not disturb the general rule for a taxpayer already filing in California who simply wants a different answer on a specific item going forward. The statute does not hand a taxpayer an open menu; a separate California election is available only where it is expressly authorized, by the statute itself or by Franchise Tax Board regulation, and made in the manner the department specifies. The installment method question is really a question of whether that authorization and that manner exist for section 453, and they do, through the form the department has long provided for exactly this purpose.
What electing out federally actually does
Internal Revenue Code section 453 makes the installment method the default for a sale where at least one payment is received in a year after the year of sale: gain is recognized as payments come in, spread across the note, rather than all at once. Section 453(d) lets a taxpayer elect out of that default and instead recognize the entire gain in the year of sale. The election is made simply by reporting the full amount realized, including the full face amount of any installment obligation, on the return filed for the year of the sale, under Treasury Regulation section 15A.453-1(d). It has to be made by the due date of that return, including extensions, under section 453(d)(2) and the same regulation.
Once made, the election is not a light switch a taxpayer can flip back on a change of mind. Section 453(d)(3) permits revocation only with the consent of the Secretary, and the regulation adds that consent will not be granted where a purpose of the revocation is avoiding federal income tax or where the year in which a payment was received has already closed. A taxpayer electing out federally, commonly to accelerate gain recognition into a single year because some other federal planning strategy depends on having the full gain in hand at once, is making a real, largely irreversible choice for federal purposes. Nothing in section 453 or its regulations, however, purports to bind what happens on the California return. The federal election controls the federal answer to when the gain is federal taxable income; it does not, by its own terms, answer the separate question of when the same gain becomes California taxable income.
Making the California-only election: Form 3805E, not Form 3115
This is where the 2018 file's internal discussion actually landed, and it holds up. FTB Notice 2000-8, issued in 2000, was for years the department's standing guidance on requests for a California accounting period or method different from the federal one; it directed taxpayers to complete federal Form 3115, for a method change, or Form 1128, for a period change, using California figures rather than federal ones, and to file the completed form directly with the Franchise Tax Board rather than the Internal Revenue Service. That notice has since been superseded. FTB Notice 2020-04, issued December 30, 2020, replaces it, states expressly that it supersedes Notice 2000-8 as corrected by Notice 2001-2, and carries forward the same basic architecture: a taxpayer seeking California treatment different from the federal accounting period or method still submits a completed Form 3115 or Form 1128 with California information, generally at least sixty days before the return's due date for a change that requires consent.
Neither notice, in its current or prior form, mentions installment sales or section 453 at all. Both are expressly framed around changes in overall accounting periods and methods, the kind of change that at the federal level goes through the Form 3115 or Form 1128 process because it touches how the taxpayer accounts for income generally, not how a single transaction is reported. Electing in or out of the installment method for a particular sale is different in kind. It is a one-time, transaction-level election under section 453(d), made by how a specific sale is reported on the return for the year of that sale, not a change to the taxpayer's overall method of accounting. Because the notices' Form 3115 procedure is aimed at method and period changes and does not purport to cover section 453 elections, the general separate-election authority in section 17024.5(e)(3)(A) and section 23051.5(e)(3)(A) is what actually governs, and the Franchise Tax Board's specified manner for that particular election is the form it has long published for the purpose: Form 3805E, Installment Sale Income. A taxpayer wanting installment treatment for California on a sale where the federal election was to take the full gain in the year of sale completes Form 3805E for the California return, computing gross profit percentage and reporting payments received during the year exactly as the form contemplates, without also filing a Form 3115 with either the Internal Revenue Service or the Franchise Tax Board. That is the practical reading; it is not a holding stated in so many words by any notice, ruling, or statute, which is why it belongs to informed practice rather than to a single citable sentence, and it should be described to a client that way.
Reporting the divergence, and the 2025 conformity-date change
Once the elections diverge, they stay diverged for the life of the note, and the California return has to carry a running adjustment for as long as payments continue. For an individual, the mechanics run through the Schedule D (540) instructions and the worksheet they provide for a sale where California and federal report different gain because of a different election: the taxpayer figures the gain that would be recognized under the installment method for California, compares it to the gain already reported federally, and carries the difference to Schedule CA (540), Part I, Section A, line 7a, as a subtraction in the year of sale, when federal recognizes more gain than California does, and as an addition in later years, as installment payments come in and California recognizes gain federal has already reported. The corporate return carries an analogous adjustment on the California return for corporations, though the line-by-line mechanics on that side deserve their own confirmation before a corporate engagement relies on this description.
The other item worth checking, because the file this is built from is from 2018, is whether anything about California's general conformity date has changed since. It has: Senate Bill 711 (Stats. 2025, ch. 231) advanced California's specified conformity date to the Internal Revenue Code from January 1, 2015 to January 1, 2025, effective for taxable years beginning on or after January 1, 2025. That is a real and current change, and it matters for plenty of federal provisions California had not yet incorporated. It does not change anything about the analysis here. Section 453 and its election-out mechanics have not been substantively rewritten in the years the old conformity date already covered, and the separate-election framework in sections 17024.5(e) and 23051.5(e) is not itself tied to the specified conformity date at all; it is a standing structural rule about how elections are treated, not a provision that gets refreshed each time the conformity date moves. The conformity-date change is worth flagging to a client only so nobody assumes the old January 1, 2015 figure still describes current law elsewhere in the return.
Practice notes
A properly executed California-only installment election starts with the federal election-out itself: it has to be timely under section 453(d)(2), meaning made by the original due date of the federal return, including extensions, for the year of sale, because a late or defective federal election creates state-side confusion about what was actually elected before the California-only question is even reached. The engagement should confirm the federal Schedule D reporting for the year of sale actually reflects an election out, not merely an omission, since a return that inadvertently uses the installment method federally has made no election to diverge from at all.
On the California side, the analysis should document, contemporaneously, why Form 3805E rather than Form 3115 is the correct vehicle, since an examiner unfamiliar with the distinction may default to expecting the notice's method-change procedure; having the statutory basis, the notice's own scope language, and the form's design lined up in the file avoids relitigating the point during an audit. The running Schedule CA adjustment needs a maintained schedule for the life of the note, tracking gross profit percentage and payments received each year, because the state-versus-federal gap does not resolve itself and a missed year of adjustments compounds. And because Form 3805E's instructions exclude post-1986 sales of publicly traded stock or securities and sales that would produce a loss rather than a gain, the underlying transaction should be checked against those exclusions before the California-only election is built into the plan; the mechanism described here works for the ordinary sale of real or personal property other than inventory, not for every asset class.
This article states the law as of September 19, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.