California Governor Gavin Newsom signed legislation to close its budget deficit of an estimated $46 billion. The legislation aims to increase revenue through $16 billion in spending cuts and raising taxes on some businesses.
Net Operating Losses
The net operating loss (NOL) deduction for taxpayers with business income over $1 million will be suspended for tax years beginning on or after January 1, 2024, and before January 1, 2027.
The carryforward period for NOLs denied because of the suspension is extended by the number of years the NOL is denied.
SB 175 includes a provision restoring the NOL deduction for 2025 and/or 2026 if the California Director of Finance and legislature determines that the General Fund revenue forecast is sufficient without the impact of the NOL suspension and credit limitation.
Utilization of Business Credits
The legislation also includes a $5 million limitation on the utilization of business tax credits for tax years beginning on or after January 1, 2024, and ending before January 1, 2027.
The allowable carryforward period for denied credits due to the limitation is extended by the number of tax years any portion of the credit was denied.
SB 175 allows a taxpayer to make an irrevocable election to treat suspended credit amounts as a refundable credit claimed over a five-year period beginning with the third year after the election is made.
SB 175 also includes a provision allowing an early sunset of these limitations for 2025 and/or 2026 if the California Director of Finance and legislature determines that the General Fund revenue forecast is sufficient without the impact of the NOL suspension and credit limitations.
Impact
The changes in this new legislation will most impact business taxpayers with significant profits. California taxpayers will need to carefully consider the impact of this legislation on their 2024 tax planning.
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