2019-2020 Legislative Session: Tax Year in Review

The California legislature made several tax changes during the 2019-2020 legislative session to reduce a projected budget deficit and to provide tax relief and hiring incentives for small businesses.

The economic downturn from the COVID-19 pandemic dominated the tax agenda for the 2019-2020 California legislative session. The legislature made several corporate tax changes to raise revenue in response to a projected record budget deficit of $54 billion and passed legislation to provide tax credits and other relief to small businesses.

Key revenue raisers are the suspension of net operating loss (NOL) deductions and a $5 million limit on tax credits. Other tax changes include a small business hiring tax credit, sales tax relief, an expanded first-year franchise tax exemption, and the exclusion from gross income of loans forgiven under the Paycheck Protection Program (PPP). The legislature also passed legislation to suspend the adjustment of the cannabis excise tax and to allow certain foreign companies to maintain a valid water’s edge election if a foreign affiliate becomes taxable in California.

Revenue raisers: NOL suspension and credit limit

AB 85, a budget trailer bill, suspended NOL deductions for 2020, 2021, and 2022 for corporate and individual taxpayers with more than $1 million in net business income or “modified adjusted gross income.” The bill also extended the 20-year NOL carryover for deductions that are denied during the suspension. The extension is one year for losses incurred in 2021, two years for losses incurred in 2020, and three years for losses incurred before 2020.

AB 85 also placed a $5 million limit on business incentive tax credits for a combined group for 2020, 2021, and 2022.

Small business sales tax extensions and relief

Small businesses received an automatic extension on payments for sales taxes due for the fourth quarter 2020 and the first quarter of 2021. Businesses with less than $1 million in sales tax will receive an automatic three-month extension on payments and returns. Businesses with $5 million or less in taxable sales can receive a one-year, payment plan for sales and use tax liability of up to $50,000 and at no interest. Businesses with sales of more than $5 million are eligible for tax payment plans if they have a significant drop in sales due to the pandemic.

Tax reductions and hiring incentives

Small business hiring tax credit: SB 1447 provides tax credits of up to $1,000 for each net increase in employees by November 30, 2020. Businesses with fewer than 100 employees before the pandemic and that had a 50 percent decrease in gross receipts in the second quarter of 2020 compared to the same quarter in 2019 are eligible. Businesses can carry the credit forward through 2025, and there is a $100,000 limit for an eligible business. The program was funded at $100 million.

First-year exemption for franchise tax: AB 85 extended the first year exemption from the $800 minimum franchise tax for corporations to also cover pass-through entities for taxable years between 2021 and 2024.

PPP loan forgiveness: AB 1577 allows businesses to exclude the proceeds of forgiven PPP loans from gross income. This change conforms California law to the CARES Act. The bill, however, denies otherwise allowable credits and deductions for expenses paid with the proceeds of forgiven loans.

Suspension of cannabis excise tax adjustment: AB 1872 suspended for 2021 annual adjustments to the excise and cultivation taxes on recreational cannabis while lawmakers weigh changes to the state’s cannabis taxation rules.

Water’s Edge bill: AB 3372 allows foreign companies that belong to a unitary corporate group and are newly taxable in California due to the state’s economic nexus threshold to maintain a valid water’s edge election. It applies to foreign affiliates that becomes taxable in California beginning on or after January 1, 2021. California’s water’s edge election is an alternative to the worldwide combined reporting method that allows taxpayers to exclude affiliated foreign corporations from their tax calculation.

Other bills

• California Economic Improvement Tax Voucher Act: AB 107 establishes the California Economic Improvement Tax Voucher Act, which requires the Franchise Tax Board to develop a plan by March 1, 2021 for a California tax voucher program to be considered by the legislature.

• Federal conformity on loans from retirement accounts: AB 276 provides conformity to the qualified employer plan loan provisions of the federal CARES Act.

• Nonresident taxpayers filing group returns: AB 2660 prohibits the Franchise Tax Board from requiring a nonresident alien to provide a SSN or ITIN when filing a state tax return and allows the filing of a group return for electing nonresident aliens.