Genetic CLN5 variants are associated with childhood neurodegeneration and Alzheimer's disease; however, the molecular function of ceroid lipofuscinosis neuronal protein 5 (Cln5) is unknown. We solved the Cln5 crystal structure and identified a region homologous to the catalytic domain of members of the N1pC/P60 superfamily of papain-like enzymes. However, we observed no protease activity for Cln5; and instead, we discovered that Cln5 and structurally related PPPDE1 and PPPDE2 have efficient cysteine palmitoyl thioesterase (S-depalmitoylation) activity using fluorescent substrates. Mutational analysis revealed that the predicted catalytic residues histidine-166 and cysteine-280 are critical for Cln5 thioesterase activity, uncovering a new cysteine-based catalytic mechanism for S-depalmitoylation enzymes. Last, we found that Cln5-deficient neuronal progenitor cells showed reduced thioesterase activity, confirming live cell function of Cln5 in setting S-depalmitoylation levels. Our results provide new insight into the function of Cln5, emphasize the importance of S-depalmitoylation in neuronal homeostasis, and disclose a new, unexpected enzymatic function for the N1pC/P60 superfamily of proteins.