Corporate, flow-through, and personal income taxpayers may be affected by changes to NOLs and credit limitations in California, specifically to cash flow and, for corporations, accounting for income taxes (ASC 740).
By Davinia Lyon and Judy Vorndran
In a mandate sure to impact many companies, California has suspended net operating loss (NOL) deductions for tax years beginning in 2020, 2021, and 2022, and limited the use of California tax credits to $5 million for each taxpayer in the same tax years.
AB 85 suspends NOL deductions for business and pass-through entity taxpayers with net business income of $1 million or more for tax years beginning January 1, 2020 through January 1, 2023. These taxpayers will gain an extra carryover period to use NOLs for each year of the suspension. The suspension does not apply to California NOLs for tax year 2019, which can still be fully used on California returns.
AB 85 also limits the use of business tax credits to no more than $5 million in tax credits for tax years 2020, 2021 and 2022 on a combined group basis. Taxpayers unable to use a credit due to the limitationhave their carryforward period for the credit extended an additional carryforward year for each year the credit is impacted by the limitation.
The Takeaway
Corporate, flow-through, and personal income taxpayers may be affected by this change, including the research and development credit and jobs tax credit. Businesses should consider this impact on their California filing positions. This will specifically impact cash flow analysis as well as potential ASC 740 implications for corporations. Get in touch with your TaxOps Advisor for guidance on addressing these changes.
Let’s Talk Tax
Davinia Lyon can be reached at dlyon@sarahf14.sg-host.com or 720.512.5438. Follow Davinia on LinkedIn.
Judy Vorndran can be reached at jvorndran@sarahf14.sg-host.com or 720.227.0420.
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