On June 27, 2024, California enacted budget trailer legislation that contains significant tax changes (Senate Bill 167) and is likely to impact most California taxpayers.
Among the provisions of the trailer legislation are a suspension of the net operating loss (“NOL”) deduction for tax years 2024–2026 for individual and corporate taxpayers with net business income or modified adjusted gross income of $1 million or more, and a limit of $5 million of business credits on the aggregate use of otherwise allowable business tax credits that any individual or corporate taxpayer could claim for tax years 2024–2026. Other NOL and business tax credit limits were previously in place for tax years 2020–2021, but were removed for tax years commencing after January 1, 2022. For any NOL or NOL carryover denied a deduction due to this suspension, the carryover period under Section 172 of the Internal Revenue Code of 1986, as amended, will be extended (i) by 1 year for losses incurred in the 2025 tax year; (ii) by 2 years for losses incurred in the 2024 tax year; and (iii) by 3 years for losses incurred in the 2023 tax year or earlier.
To further complicate the determination of the amount of NOL deduction and the use of business credits, on June 29, 2024, California enacted Senate Bill 175, which reverses the effect of the disallowance and limitations described above for any calendar year in which the California Director of Finance determines by May 14 that California will generate sufficient revenue for its General Fund without the revenue impact of the NOL suspension and credit limitation.
This development is relevant to individual and corporate taxpayers if such taxpayer is located in California or has operations in California (generally, if such taxpayer files tax returns in California). Additionally, if an impacted taxpayer is contemplating a transaction in California, the taxpayer should assess the impact, if any, of this legislation as soon as practicable.
Please reach out to your WilmerHale contact, or any member of the WilmerHale Tax department, with questions or for more details.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.