California Limits NOLs and Business Tax Credits

by | Jul 19, 2024 | State and Local, Tax News

California’s new laws, Senate Bill 167 and S.B. 175, suspend net operating loss (NOL) deductions — which is bad for business — and limits business tax credits for high-income businesses and individuals.

By Meredith Smith

California has signed into law Senate Bill 167 and S.B. 175, suspending the net operating loss (NOL) deduction for businesses with more than $1 million in income and limiting business tax credit use. Both bills are designed to raise revenue if revenue fails to reach set-upon budget figures. These laws affect corporate taxpayers beginning the second quarter of 2024. 

Senate Bill 167 

S.B. 167 suspends NOLs for tax years beginning January 1, 2024, until January 1, 2027, for businesses with California-apportioned income and individuals with income of at least $1 million. Allowable carryforward periods for denied NOLs are extended by the following: 

  • One addition year in the carryover period for losses incurred January 1, 2025, until before January 1, 2026 
  • Two years for losses incurred in tax years incurred January 1, 2024, until before January 1, 2025 
  • Three years for losses incurred before January 1, 2024 

S.B. 167 limits the use of tax credits to $5 million for certain businesses and individuals for tax years January 1, 2024, until January 1, 2027. This includes limitations to the research tax credit and the California Competes credit but several exemptions apply, including elective pass-through entity tax and low-income housing. Both personal income and corporate income credits are similarly limited to the $5 million cap, other than the low-income housing credit. Credits denied by S.B. 167 will remain a credit carryover, with the carryover periods extended by the number of tax years that any portion of the credit was denied.  

Senate Bill 175 

S.B. 175 provides taxpayers with an irrevocable election for an annual refundable credit during a five-year period. The credit is 20% of the qualified credit that would have been allowed without the $5 million limitation set by S.B. 167. For taxable years beginning January 1, 2025, and before January 1, 2027, the credit limitation will not apply if an annual revenue trigger set in the annual budget is met.  

The Takeaway 

Limiting NOLs is a short-term policy fix that is good for states, bad for businesses. The suspension of NOL utilization often catches taxpayers off guard when there are outlier taxpaying jurisdictions. This can further complicate tracking of tax benefits when states provide extensions to carryforwards for the suspended NOL periods that need to be reflected in your tax provision.  

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