California Senate Bill 167 was signed into law on June 27, 2024, and is intended to address the state’s budget $27.6 billion shortfall for 2024 and 2025, as well as the projected 2025 and 2026 deficit of $28.4 billion. The new California legislation restricts the use of net operating losses (NOLs) and limits the application of tax credits to $5 million, offsetting California state taxes against corporation and personal income taxes per taxpayer or combined reporting group for tax years 2024, 2025 and 2026. This bill is reminiscent of A.B 85, which limited the application of business tax credits to $5 million per taxpayer for years 2020 – 2022.
What Does This Mean for California Business Tax Credits?
This new limitation applies to most business tax credits, including the California R&D Tax Credit. However, the low-income tax credit is excluded from this limitation. Additionally, credit carryforward periods are extended by the period of suspension, but this does not apply to any taxpayer with net business income or modified adjusted income of less than $1 million. Furthermore, the current 20-year NOL carryforward is extended if losses are unable to be utilized as a result of the suspension for up to three years.
California Senate Bill 175
Additionally, California lawmakers enacted a companion bill to provide relief from Senate Bill 167. Signed on June 29, 2024, California Senate Bill 175 proposes a suspension clause for the 2024 and 2025 tax years. If the limits and suspensions do not apply by May 14, 2025, or 2026, the Director of Finance determines that the multi-year forecast for General Fund monies are sufficient without the NOL suspension and credit limits.
S.B. 175 provides taxpayers with an option to make an irrevocable election, in the amount of 20% of the qualified current year tax credit. The credits are subject to the limitation as an annual refundable credit during the period of limitation. The annual refundable credit amount shall be allowed as a credit against tax for the first 5 tax years, beginning the third tax year after the election is made.
For example:
| 2024 Taxpayer Credits | $8,000,000 |
| 2024 Credits subject to limitation | $5,000,000 |
| 2024 Refundable Credit Election (utilized in 2027) | $600,000 per year for 5 years |
Your Guide Forward
For any questions on how your business operations utilizing state tax credits is impacted by this new legislation, reach out to our Research & Development Tax Credit team.
