New California Tax Legislation: What You Need to Know

Do you have a company or conduct business in California? Then this new change potentially affects you!

Net Operating Losses (NOLs) Suspension:

California has enacted legislation suspending the use of net operating losses (NOLs) for taxpayers with net business income of $1 million or more for tax years 2024, 2025, and 2026. However, California’s NOL carryforward period may be extended for each year of suspension.

Limitations on Business Credits:

The new legislation also limits the use of California business credits, including the research and development (R&D) credit, to a combined total of $5 million, applied on a combined-group basis, for the same tax years. The limited credit carryover period may be extended for each year of limitation.

Refundable Business Tax Credits:

Additionally, the legislation allows business tax credits that are limited during tax years 2024, 2025, and 2026 to be refunded after the limitation period ends. Affected taxpayers may irrevocably elect, on an original timely filed return for tax years 2024, 2025, or 2026, to receive an annual refund of their qualified credits. The refund will be available for the five consecutive tax years beginning the third tax year after the election is made. For each of these five years, the refund will equal 20% of the qualified credits that would have otherwise been available but for the $5 million limitation on credit use.

What does this mean for you?

If you have California NOLs or other credit carryovers, you will have to elect when to receive your refund and be aware that the use of NOLs over $1 million is suspended. Please reach out to our tax team for more information and guidance.bruary 23, 2021, regarding the enactment of the CTA. This tax alert is intended as an update.