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:


Taxable Years Beginning

Carryover Extension Period

Before Jan. 1, 2020

3 Years

Jan. 1, 2020 – Dec. 31, 2020

2 Years

Jan. 1, 2021 – Dec. 31, 2021

1 Year


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.

What does CohnReznick think?

We recommend proactive tax planning to manage a company’s California income tax position due to these new limitations on the use of NOLs and incentive tax credits.


Krista Schipp, CPA, Director, State and Local Tax Services


John On, Manager, State and Local Tax Services


Subject matter expertise

  • corey rosenthal
    Contact Corey Corey+Rosenthal
    Corey Rosenthal

    JD, Principal, Practice Leader, State and Local Tax (SALT) Services

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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.