On June 27, 2024, California enacted a number of corporate and personal income tax changes including following:
- suspending net operating loss (NOL) deductions for 2024, 2025, and 2026.
- capping business credits at $5 million per year for 2024, 2025, and 2026.
- eliminating a deduction for intangible drilling and development costs for oil and gas wells.
- modifying depletion deduction provisions.
NOL Suspension
As was the case in 2020 – 2021, for taxable years 2024 – 2026 no NOL deductions will be allowed under the corporate tax or personal income tax law, except for taxpayers with CA net income or modified adjusted gross income of less than $1 million for the taxable year. The carryover period for any NOL for which the deduction is suspended will be extended by:
- one year for losses incurred in taxable years beginning on or after January 1, 2025, and before January 1, 2026;
- two years for losses incurred in taxable years beginning on or after January 1, 2024, and before January 1, 2025; and
- three years for losses incurred in taxable years beginning before January 1, 2024.
Intangible Drilling and Development Costs Deduction
The deduction for intangible drilling and development costs, in the case of oil and gas wells, will not apply to costs paid or incurred on or after January 1, 2024.
Depletion Deductions
For taxable years beginning on or after January 1, 2024, California disallows the calculation of depletion as a percentage of gross income from property for specified natural resources, including coal, oil, oil shale, and gas. California has also repealed a provision stating that it did not conform to federal law preventing large crude oil producers from calculating a depletion deduction as a percentage of gross income.
Business Credits Cap
For taxable years beginning on or after January 1, 2024, and before January 1, 2027, the total of all business credits otherwise allowable to a taxpayer under the corporate or personal income tax law, including the carryover of any business credits, may not exceed $5 million per taxable year. For taxpayers required or authorized to be included in a combined report, the total of all business credits must not reduce the aggregate amount of tax of all members of the combined report by more than $5 million per taxable year. The amount of any credit not allowed due to this limitation will remain available as a credit carryover. The carryover period for any credit not allowed due to the limitation will be increased by the number of taxable years the credit was not allowed.
An exemption from the limitation is provided for low-income housing credits and specified nonbusiness personal income tax credits. Also, certain credit amounts that a taxpayer elects to apply against sales and use tax are not included in the limitation.
Senate Bill 175 (enacted June 29, 2024) authorizes taxpayers to make an irrevocable election on an original timely filed return for each tax year, beginning on or after Jan 1, 2024, and before Jan 1, 2027, to receive an annual refundable credit amount of qualified credits (credits that are subject to the limitation during the three-year limitation period). The “annual refundable credit amount” is 20% of the credit amount for the tax year. “Credit amount” means the amount of the qualified credits that would otherwise have been available to reduce net tax in the tax year of the election but for the limitation. For the first five tax years beginning with the third tax year after the taxpayer makes the election, the annual refundable credit amount is refundable to the extent that the annual credit and other credits exceed the tax due for that year.
