California Approves Restriction on Use of NOLs and Tax Credits

Facing a revenue decline as a result of the COVID-19 pandemic, the state of California is taking steps to protect state income tax revenue. Gov. Gavin Newsom approved limiting state businesses’ use of tax benefits, including net operating losses (NOL) and income tax credits to reduce state income tax obligations.

Assembly Bill No. 85’s limit on NOLs applies to businesses with net business income or modified adjusted gross income of $1 million or greater. California is capping the amount of total business tax credits to $5 million of total annual tax liabilities. Restrictions will be in place for the 2020, 2021, and 2022 tax years.

Taxpayer Takeaways

States vary on their conformity to federal tax law. Therefore, it is important to understand each state’s treatment of federal income tax provisions when determining your state tax obligations. California is just one of the states taking action relative to recent COVID-19-related tax relief. Nearly every jurisdiction has been affected by the COVID-19 disruption, and many may similarly be projecting tax revenue declines that could be further reduced by CARES act provisions.

For questions about how the California change will affect your filing, please contact a member of our team

Published on July 02, 2020