California approves budget changes including NOL suspension, tax credit limitations

California Gov. Gavin Newsom recently signed into law key provisions of the new state budget. The budget includes tax measures that will cause an estimated $9.2 billion tax increase over a three-year period. This is intended to offset the economic impact of the COVID-19 pandemic. 

The significant income tax provisions of the budget are:

1. Net operating loss (NOL) suspension for taxable years beginning in 2020 – 2022. This will apply to individuals, flow-through entities, and C corporations, except those with a net business income or modified adjusted income of less than $1 million.

• The budget also extends for up to three years the carryforward period for NOLs not used because of the suspension (currently 20 years, or 10 years for 2000-2007 tax year losses). See the table below for details.

2. Business tax credit limitation of $5 million for taxable years beginning in 2020 – 2022. This annual limit applies to individuals and corporations. (For taxpayers that must be included in a combined group, the limit is a single combined $5 million, not $5 million each).

Examples of the most common credits affected are the R&D credit, hiring credits (including the California Competes credit), and motion pictures credits. Examples of credits not affected are low-income housing credits and credits for individuals, such as head of household and dependent credits.

Carryover for NOL and Credits disallowed deductions will be extended as follows:

3. Expanding the state’s first-year exemption from the $800 annual minimum tax to include limited partnerships, limited liability partnerships, and limited liability companies for the 2020 – 2023 tax years.

4. Capping an existing election to convert income tax credits for film production to sales tax credits to $5 million annually for tax years 2020 – 2022. In addition, the carryover period for unused credit caused by this limit will be extended for five years.

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