One of the tax provisions of the Governor’s proposed budget for the 2022-23 fiscal year is to eliminate the limitations on the use of tax credits and net operating losses (NOLs) for the tax year beginning on or after January 1, 2022. On February 9, 2022, Governor Newsom signed SB 113 to provide additional taxpayer relief, which includes restoring the NOL deduction and business tax credits (including the research and development credits), one year earlier than originally scheduled.
The NOL suspension and tax credit limitations were enacted as part of AB 85 on June 29, 2020, which provided an exemption for small businesses. The NOL suspension provisions apply to corporations if their business taxable income subject to California taxation is over $1M, and to businesses subject to personal income tax if they have net business taxable income and modified adjusted gross income over $1M. The original provisions affect individuals, flow-through entities and corporations for tax years 2020, 2021 and 2022. Utilization of general business credits are limited to $5M each year for tax years beginning on or after January 1, 2020 through December 31, 2022. SB 113 retains the original language with respect to the law and taxpayer application but is now applicable only to the 2020 and 2021 tax years.
Taxpayers that have unused NOLs and general business tax credits and expect business growth during 2022, should be able to take advantage of this early elimination of NOL suspension and tax credit limitations. This change in law may alleviate or reduce a 2022 California tax liability; providing businesses more cash for operations. This relief may help those taxpayers who expect taxable income for 2022 and have cumulative NOLs from prior years. We advise taxpayers to assess their tax planning strategies to determine the effect of this benefit.
BPM has our attention trained on the tax matters impacting your business so that you can stay informed. If you have further questions about how this development may affect you, we encourage you to reach out to your BPM Tax team immediately so that we may work with you to determine the optimal course of action for your unique situation.