October 26, 2010

California Suspends Net Operating Losses Again

California Suspends Net Operating Losses Again Tax & Business

California Governor Arnold Schwarzenegger recently signed the state’s Budget Act of 2010 which continues the suspension of the California net operating loss (NOL) tax benefit for an additional two years. Sound familiar? It should, since California suspended 2008 and 2009 NOL’s at about the same time two years ago and also suspended 2002 and 2003 NOL’s after the dot com bust.

When the California budget is in trouble, California seeks to raise extra short term revenue through targeted taxes on businesses and individuals, those that are profitable and have loss carryovers. Whether you own a business subject to corporate tax, or are subject to personal income tax, California’s suspension of NOL’s for an additional two years is likely to impact your overall tax liability.

The California NOL suspension under California’s Budget Act of 2010 establishes the following:

  • Suspension of NOL’s would not apply to corporate taxpayers with $300,000 or less of pre-apportioned income (net business and nonbusiness income before apportionment and allocation) and personal income taxpayers with $300,000 or less of modified adjusted gross income (AGI). The previous exemption for the 2008 and 2009 NOL suspension was based on a $500,000 threshold for both corporate and personal taxpayers.
  • Taxpayers with NOL’s incurred prior to January 1, 2008, will still have a full 10 years during which to utilize their NOL deductions with the carryforward period being tolled for the years of suspension.
  • Taxpayers may still calculate and compute their NOL’s but may not take a NOL deduction in the suspended years.
  • Carrybacks, never available previously, will be allowed for NOL’s incurred during tax years beginning on and after January 1, 2013, and the carryback period will be two years.
  • The carryback provision will phase-in, with a specified percentage that may be carried back of 50% for losses incurred in taxable years beginning in 2013; 75% for losses incurred in years beginning in 2014; and 100% (full carryback) for losses incurred in subsequent tax years.

To find out how this new law may affect your tax planning and reporting, call your Marcum LLP Tax Professional today.

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