Last week, the California House and Senate passed Governor Gavin Newsom’s proposed tax legislation to raise taxes in an effort to balance the California budget. Assembly Bill 85 was enrolled on June 16, 2020. The bill calls for the suspension of the use of net operating loss deductions in 2020-2022. The suspension applies to both individuals and corporations for years in which the taxpayer has more than one million dollars of taxable income before the application of the net operating loss (NOL). The suspended NOL will be extended for use past the 2022 moratorium based on respective limitations.
The law will also restrict the use of tax credits to five-million-dollars to offset California income tax liability in 2020-2022. Again, this limitation applies to both individuals and corporations. Combined groups will be limited to a single combined five-million-dollar limit. Any credit that cannot be used due to the limitation will carryforward based on the years of suspension.
This Monday, June 23, 2020, the Governor and legislative leaders announced that they have reached an agreement on school funding, the last holdout in the budget bill. Now that the school funding issue has been worked out, it is expected that Senate Bill 121 will be passed on Thursday or Friday of this week. With a final budget with these temporary tax increases, taxpayers may want to carefully evaluate their California 2019 returns and 2020 estimated payments to account for these changes. Also, taxpayers, in the process of negotiating credits with the state, may also wish to consider the impact of the suspension of the credits.
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Mark L. Nachbar
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