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California NOL Suspension and Business Credits Limitation

07.01.20

On June 29, 2020, California Gov. Gavin Newsom signed Assembly Bill 85 into law, which temporarily suspends net operating loss (NOL) deductions for most businesses and limits certain general business credits. These provisions will be applied retroactively to tax years beginning on or after January 1, 2020 through December 31, 2022

NOL Suspension

The NOL suspension provisions apply to taxpayers with business income or modified adjusted gross income over $1 million. The new provisions affect individuals, flow-through entities and corporations for three years (2020, 2021 and 2022).  

The bill also extends the carryover period for losses disallowed during the temporary suspension:

  • One year for losses incurred in tax years beginning on or after January 1, 2021, but before January 1, 2022
  • Two years for losses incurred in tax years beginning on or after January 1, 2020, but before January 1, 2021
  • Three years for losses incurred in tax years beginning before Jan. 1, 2020

Tax Credit Limitations

Utilization of general business credits will be limited to $5 million each year for tax years beginning on or after January 1, 2020 through December 31, 2022. The $5 million limitation will apply to a combined group, if the taxpayer files tax return on a combined basis.

Key Takeaway

If you expect to use NOL deductions and general business credits to reduce your California tax liabilities for 2020, we advise you assess your tax planning strategy to see if these provisions will change your tax situation. As a reminder, California repealed the opportunity to carryback NOL deductions beginning in 2019. Therefore, any restrictions on utilization of NOL deductions and general business credits will impact your organization’s cash situation.

Contact us or reach out to your BPM tax advisor to learn more.