The California 2024-2025 budget enacted two recent tax bills, which may impact taxpayers with California Net Operating Loss (NOL), California tax credits and water’s-edge filers with foreign dividend income. A summary of these bills is highlighted below:

SENATE BILL 167

California Senate Bill 167 (SB 167) was enacted into law on June 27, 2024.

Relevant provisions to taxpayers in SB 167:

• California NOL Suspension: For tax years beginning on or after Jan. 1, 2024 and before Jan. 1, 2027, NOLs are suspended for both corporate and personal income taxes. The suspension will not apply to any taxpayer with California net business income of less than $1 million for the applicable tax year. The existing 20-year carryforward period for NOLs is extended for up to three years if losses are not able to be used due to the NOL suspension.

• Limitation on Credit Utilization: For tax years beginning on or after Jan. 1, 2024 and before Jan. 1, 2027, businesses (including combined business entities) may claim a maximum $5 million in credits under both the corporate and personal income tax laws. However, certain personal income tax credits and elective pass-through entity tax credits are not included under the limitation.

• Apportionment Fix: SB 167 adopts Legal Ruling 2006-1 and provides a clarification that when a corporation receives income that is excluded from taxable business income, it must exclude this income from its apportionment factor. SB 167 reverses a recent Office of Tax Appeals’ (OTA) decision in Appeal of Microsoft Corp and Subsidiaries, No. 21037336 (7/27/23). Note that the OTA decision was issued as nonprecedential. Taxpayers should consider the impact of this legislation on any refund claims, long-term planning strategies or other retroactive positions taken in reliance on the OTA decision.

SENATE BILL 175

California Senate Bill 175 (SB 175) was enacted on June 29, 2024. SB 175 is a companion bill to SB 167.

Relevant provisions to taxpayers in SB 175:

• Provision to Eliminate NOL Suspension: SB 175 may eliminate the NOL suspension and credit limitation for the tax years 2025 and 2026 (enacted by SB 167 and detailed above) if the Director of the California Department of Finance determines that General Fund money over the multi-year forecast is sufficient without the revenue impact of the NOL suspension and credit limitation.

• Refundable Credit - SB 175, for taxable years beginning on or after Jan. 1, 2024 and before Jan, 1, 2027, allows taxpayers to make an irrevocable election to receive an annual refundable credit amount, beginning the third taxable year after the election is made, equal to 20 percent of the qualified credits that would have otherwise been available (to reduce the net tax) but for the $5 million business tax credit limitation as enacted in SB 167. As a result, taxpayers may claim a refund for a range of tax credits including California Research and Development (R&D) credit for the first time.

GHJ’S OBSERVATION

Taxpayers should consider appropriate planning if they are impacted by NOL and credit limitations. The legislation retroactively overturns OTA’s findings with respect to apportionment representation for deductible income. Taxpayers should consider the impact of these legislations on any refund claims or amendments as appropriate.

To better understand whether a business or individual would be impacted as a result of these legislative changes, please reach out to GHJ’s State and Local Tax Practice