California Assembly Bill 85 was signed by the Governor on June 29, 2020. It disallows a California net operating loss (NOL) deduction for any taxable year beginning during 2020, 2021 and 2022. The disallowance applies only to taxpayers with taxable income or modified adjusted gross income of $1 million or more for each year.
If the NOL carryover deduction is disallowed in 2020, 2021 or 2022, the NOL period is carried forward and extended for up to three years for each year of suspension. For example, for tax years with NOL carryforwards beginning before January 1, 2020 the extension can be for up to three years if utilization is disallowed for each year 2020, 2021 and 2022.
The Bill also puts a limit on the use of incentive tax credits. For each tax year 2020, 2021 and 2022, credits may not reduce tax by more than $5 million. If it is a combined group, the limit applies to the combined group so that the maximum credit that can be taken by the combined group is $5 million. If the credit is limited, then the carryover period will be extended for each year it is limited. The applicable credits include the research credit, the qualified motion picture credit, and California Competes credit, among others.
It will be important to apply the rules to year-end tax planning and estimated tax calculations.
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