In the budget package signed by California Governor Newsom on June 29, 2020 there is a new net operating loss (NOL) suspension provision in place.
For tax years beginning on or after January 1, 2020 and before January 1, 2023, California NOLs would be suspended for corporate and individual taxpayers. This will only apply to taxpayers with a net business income or modified adjusted gross income of $1 million or more. The 20-year NOL carryforward will be extended up to three years in compensation for the three-year suspension as laid out below:
- By one year, for taxable years beginning on or after January 1, 2021, and before January 1, 2022.
- By two years, for taxable years beginning on or after January 1, 2020, and before January 1, 2021.
- By three years, for taxable years beginning before January 1, 2020.
contact a member of the State and Local Tax Team.
This will be in effect in tandem with the elimination of carryback NOLs for tax years beginning on or after January 1, 2019 in conformity with the federal Tax Cuts and Jobs Act (TCJA). California also has not adopted the NOL provisions such as unlimited carryforward and 80% deduction limitation passed under the TCJA or the NOL carryback provisions under the federal Coronavirus Aid, Relief and Economic Security Act (CARES Act).
Who Does This Impact and How Do I Prepare?
Businesses planning on utilizing losses in managing their cash flow should consider how this legislation may impact them. States continue to face significant budget shortfalls due to COVID-19, and it is expected similar legislation will be put forth in other jurisdictions. As such, it is imperative for businesses to holistically review their state tax positions, to help with cash flow planning. Withum’s State and Local Tax Group can help businesses navigate through these uncertain times.
Authors: Jason Rosenberg, CPA, CGMA, EA, MST | [email protected] and Zhoudi Tang, CPA | [email protected]
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