Article
California passes legislation in response to the Microsoft decision
The legislation suspends Net Operating Losses, limits credit utilization and includes apportionment changes.
July 10, 2024 · Authored by Kristina Stibrich, Shannon Bonner
Background
California’s Governor approved SB-167 (the Legislation) and SB-175 which include many significant tax changes. From a corporate income tax perspective, a few notable changes include the suspension of Net Operating Losses (NOLs) for specific taxpayers, limitations to credit utilization and apportionment formula clarifications in response to the recent Microsoft case.
NOL suspension
The Legislation suspends NOL deductions for taxpayers with $1 million or more in net business income or modified adjusted gross income for the tax year. These changes are effective for tax years beginning on or after Jan. 1, 2024, and before Jan. 1, 2027.
For any NOL or carryover of a NOL for which a deduction is denied, the carryover period under Section 172 of the Internal Revenue Code shall be extended as follows:
- By one year, for losses incurred in taxable years beginning on or after Jan. 1, 2025, and before Jan. 1, 2026.
- By two years, for losses incurred in taxable years beginning on or after Jan. 1, 2024, and before Jan. 1, 2025.
- By three years, for losses incurred in taxable years beginning before Jan. 1, 2024.
California’s trailer legislation, SB 175, provides for a potential early termination of the NOL suspension for 2025 and/or 2026 if the Director of Finance determines that the General Fund money over a multiyear forecast is sufficient without the revenue impact of the NOL suspension and credit limitation detailed in the Legislation.
Credit limitation:
Beginning on or after Jan. 1, 2024, and before Jan. 1, 2027, the Legislation limits the use of business credits to no more than $5 million in one taxable year, unless an exemption applies. For taxpayers filing a combined report, no more than $5 million of credits may be used to offset the aggregate amount of tax. The carryover period for any credit that is not allowed due to this limitation will be increased by the number of taxable years the credit or any portion thereof was not allowed.
