Must-know Update on California Senate Bills 167 & 175 for Net Operating Losses

This summer, two significant pieces of legislation, California Senate Bills 167 and 175 (SB 167 and SB 175), were passed into law. These new laws could have a major impact on California taxpayers, and we want to ensure you’re informed about what these changes mean for you.

CA SB 167 – Suspension of NOL Deduction and Credit Limitation

Starting from January 1, 2024, to January 1, 2027, businesses and individuals in California with income over $1 million will face a suspension of the net operating loss (NOL) deduction. For each year this deduction is suspended, the period you have to carry forward NOLs will be extended accordingly.

A net operating loss (NOL) happens when a company’s deductible expenses surpass its taxable income during a tax period. Typically, the NOL can be utilized to reduce the company’s tax obligations in other tax periods through an IRS provision known as a loss carryforward.

There will be a $5 million cap on the use of business incentive tax credits during this period. Any credits limited by this cap will also have their carryforward periods extended in the same manner as the NOL deduction.

CA SB 175 — Credit Limitation and Relief from the Director of Finance

Under SB 175, taxpayers can make a one-time, irrevocable choice to convert qualified credits that were limited under SB 167 into refundable credits. These refunds will be distributed starting three years after the election, over a span of five years.

Another key point in SB 175 is that the suspension of the NOL deduction and the credit limitation will not apply if the California Director of Finance determines that the state’s General Fund forecast can meet its needs without these restrictions.

Be sure to contact us if you have any questions or need further clarification on how these changes might affect you. Our team is here to help.