California Suspends Net Operating Loss Deductions, Limits Business Tax Credits

California suspends the use of net operating loss (NOL) deductions and limits the use of business tax credits for tax years beginning in 2020, 2021, and 2022. The revenue-raising measures were enacted to close a budget shortfall caused by the COVID-19 pandemic.

California also suspended NOL deductions and limited tax credits in 2008-2011 to deal with budget issues.

Suspension of NOL Deductions

The suspension of NOL deductions for 2020, 2021, and 2022 applies to both individuals and corporations.

Small Businesses Not Subject to the Suspension

The suspension does not apply to:

  • individuals with net business income or modified adjusted gross income of less than $1 million for the tax year; and
  • corporate taxpayers with taxable income of less than $1 million for the tax year.

For this purpose, “business income” means income from:

  • a trade or business;
  • rental activity; or
  • a farming business.

Extended Carryover Periods

California will extend the carryover period for any NOL deduction denied because of the suspension. It will extend the carryover period by:

  • three years for losses incurred before 2020;
  • two years for losses incurred in 2020; and
  • one year for losses incurred in 2021.

Limit on Use of Business Tax Credits

Taxpayers can use no more than $5 million of business tax credits and carryovers per year to offset their tax liability for 2020, 2021, and 2022. The limit applies to credits used to offset personal income tax, corporate tax, and insurance tax.

Taxpayers included in a combined report are subject to a combined $5 million limit.

Credits Not Subject to the Limit

The limit does not apply to:

Extended Carryover Periods

The amount of any credit not allowed because of the limit will remain available to carry forward. California will extend the carryover period by the number of years the credit, or any part of the credit, was not allowed.

By Carolyn Kwock, J.D.

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CCHTaxGroup

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