California Suspension of NOL Deduction Changes Tax Planning for Businesses

2024-08-20

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California’s business climate recently worsened when the state enacted legislation suspending the net operating loss deduction for tax years beginning on or after January 1, 2024, and before January 1, 2027. The suspension applies to taxpayers with more than $1 million in net income for the tax year.

The suspension was enacted retroactively from June of this year to January 1, 2024. This means that tax planning done prior to this year based on the understanding that the NOL deduction would be available is no longer valid for most businesses. Some industries, including construction, will be hit hard.

Combined with the NOL suspension from 2020 to 2021, with the current pause on NOL deductions, only the taxable years 2022 to 2023 are eligible for the California NOL deduction.

Extended NOL Carryforward Periods

Under the suspension law, allowable carryforward periods for these NOLs are extended by the following:

• Three years for losses incurred in tax years beginning before January 1, 2024
• Two years for losses incurred in tax years beginning on or after January 1, 2024, and prior to January 1, 2025
• One year for losses incurred in tax years beginning on or after January 1, 2025, and prior to January 1, 2026

There are tax credit cutbacks as well. Under the new law, total business tax credits cannot offset more than $5 million in California tax liabilities for tax years 2024 to 2026. There are exceptions, including the Low-Income Housing Tax Credit and the Pass-Through Entity Elective Tax Credit. Any excess business credits are carried forward, and those with time limitations will be extended based on when the credit is freed from the $5 million limitation.

The suspension of the NOL deduction was enacted to help plug a $73 billion hole in California’s $310.8 billion budget. The law includes a revenue trigger provision restoring the deduction for 2025 and/or 2026 if, for each year, it is determined by May 14 that the state’s general fund is sufficient without the NOL suspension and credit limitation.

We’re here to help

Business owners whose operational and financial planning for 2024 was based partly on the expectation of the state NOL deduction and carryforwards being in place should review their plans and seek guidance from their trusted advisors.

If you would like to discuss your business tax planning and any mid-year course corrections that should be made, Contact your JLK Rosenberger team member, or click here to contact us. We look forward to speaking with you soon.