California Lifts NOL and Tax Credits Suspensions and Expands Workaround of Federal Cap on State Tax Deductions
Gov. Gavin Newsom signed into law SB 113, which includes the reinstatement of net operating loss (NOL) deductions and the removal of business tax credit limits that were imposed in 2020. The bill also expands the state’s workaround of the $10,000 federal cap on state and local tax deductions.
Reinstate of NOL Deduction and Removal of Limit on Tax Credits
In June 2020, amid a projected budget deficit of more than $54 billion, California lawmakers passed AB 85, a budget trailer bill that suspended NOL deductions for three years for corporate and individual taxpayers with incomes of more than $1 million. The bill also imposed a $5 million limit on business incentive tax credits for three years for a combined group.
The suspensions were originally for tax years beginning January 1, 2020, and ending on or before December 31, 2022. SB 113 decreased the suspension by a year to tax years beginning January 1, 2020, and ending on or after January 1, 2022.
Expansion of Workaround of Federal Cap on Deductions for State Taxes
SB 113 also made several changes to the state’s workaround of the $10,000 federal cap on state and local tax deductions retroactive to January 1, 2021.
The state enacted the workaround under AB 150, which allows certain partnerships and S corporations to elect to pay a 9.3% state income tax in exchange for a tax credit to the entity’s owners for their share of the tax. (California Enacts Workaround of Federal Cap on Deductions for State Taxes.)
The original pass-through entity tax under AB 150 excluded partnerships that are owned by other partnerships. SB 113 expands the definition of a qualified taxpayer in Section 17052.10(b)(3)(b) of the California Revenue and Taxation Code to include pass-through entities owned by partnerships as well as disregarded single-member limited liability companies.
Additional changes include:
including guaranteed payments in the PTE tax base
allowing the PTE tax credit to reduce regular tax below the tentative minimum tax; and
changing the credit order to apply PTE tax credits after credits for taxes paid to other states.