California Suspends NOL’s & Limits Credit Utilization
Submitted by Penny Sweeting, CPA and Rebecca Stidham, CPA, Partner, Withum.
Originally published in Life Sciences Insights Magazine, September 2024
To grapple with California’s $45 billion budget deficit, Sacramento lawmakers recently signed two bills that will result in another net operating loss suspension for businesses with greater than $1 million in income and limiting business tax credit utilization.
SB 167 suspends the net operating loss (NOL) deduction for 2024 through 2026 for net business income or modified AGI subject to California tax that exceeds $1 million. In addition, the bill restricts the utilization of certain business credits to $5 million during the same period. To the extent that any NOL or business tax credit is denied, carryforward periods are extended to account for lost utilization.
The second bill, SB 175, provides additional benefits for California research and development (R&D) credits. A taxpayer will be permitted to make an irrevocable election to receive a refund equal to 20 percent of the qualified credits that would have been available to the taxpayer in the absence of the $5 million limitation imposed by SB 167. The “refundable period” is the first five consecutive tax years beginning the third tax year after the tax year for which the taxpayer makes the election. The 20 percent annual credit is only refunded to taxpayers to the extent that the unused annual credit and other credits and/or NOLs exceed the amount of tax due for that tax year.
If the Director of Finance determines that revenues over a multi-year forecast are sufficient without the revenue impact of the NOL suspension and credit limitation, the Director of Finance can lift the NOL suspension.
These Senate Bills will significantly change the impact of credits and NOLs that taxpayers had been planning to use in 2024 or later, and 2024 estimates must be reevaluated to consider the impact of these changes for the 2024–2026 tax years.
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FAQ: California NOL Suspension and Business Tax Credits
SB 167 suspends the net operating loss (NOL) deduction for California tax years 2024 through 2026 for businesses with net income or modified AGI exceeding $1 million. Any NOLs denied during this period have their carryforward period extended to prevent permanent loss of the deduction.
Businesses and individuals with net business income or modified adjusted gross income subject to California tax of more than $1 million are affected. Companies below the $1 million threshold are not impacted by the suspension.
SB 167 caps the use of certain California business tax credits at $5 million per tax year for 2024 through 2026. As with NOLs, any credits denied due to the cap are subject to an extended carryforward period.
SB 175 allows eligible taxpayers to make an irrevocable election to receive a cash refund equal to 20 percent of the qualified R&D credits that would have been available absent the $5 million cap. The refund is paid out over five tax years, beginning the third year after the election year.
Yes. If the Director of Finance determines that multi-year revenue forecasts are sufficient without the revenue impact of the suspension, the Director has authority to lift the NOL suspension early.