July 7, 2020

California NOL Deduction Suspended and Limit Enacted on General Business Credits

By Alex Toback, Staff Accountant, Tax & Business Services & John Bonk, Director, Tax & Business Services

California NOL Deduction Suspended and Limit Enacted on General Business Credits State & Local Tax

On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill No.85 into law. Two major aspects of the bill are the Net Operating Loss Deduction Suspension and Limitations on General Business Credits.

NOL Deduction

A net operating loss (NOL) is created when a taxpayer’s allowable deductions exceed the amount of income during the taxpayer’s tax year. Once an NOL is created, it can be used to offset taxable income.

Under Bill 85, taxpayers will not be allowed to utilize NOL deductions to offset taxable income for tax years 2020 through 2022.

An exception to this rule is for corporate taxpayers with business income below $1 million and for individual taxpayers with less than $1 million of modified adjusted gross income.

NOL suspension rules are as follows:

  1. For any NOLs generated prior to tax year 2020, the NOL deduction will be suspended for 3 years.
  2. For any NOLs generated in tax year 2020, the NOL deduction will be suspended for 2 years.
  3. For any NOLs generated in tax year 2021, the NOL deduction will be suspended for 1 year.

The NOL suspension denies California taxpayers an advantageous and lucrative deduction that can potentially mitigate, and even eliminate, a taxpayer’s franchise or income tax liability.

Limitation on General Business Credits

For tax year 2020 through tax year 2022, taxpayers can only utilize up to $5 million of general business credits. Any credit in excess of $5 million will be carried over to future tax years.

General business credits include the following:

  • Credit for Earned Income
  • Credit for Young Child
  • Credit for Household and Dependent Care
  • Credit for Adoption Costs
  • Renter’s tax credit
  • Credit for personal exemption
  • Credit for qualified joint custody, head of household, and qualified taxpayer with a dependent parent
  • Credit for qualified senior head of household
  • Credit for low-income housing
  • Refunds pursuant to the unemployment insurance code

Please contact your Marcum State and Local Tax professional to address any questions regarding this or any other tax matter.