Retroactive California Tax Changes

California’s budget was recently signed with tax increases for business and individuals.

Net operating loss carryforward deductions will NOT be allowed for 2024, 2025 or 2026 unless you are a small business with less than $1 million in income. For individuals, the NOL deduction is suspended unless BOTH your (a) adjusted gross income and (b) business income are under $1 million.

Both individuals and corporations will be limited to a maximum $5 million in tax credits per year for 2024, 2025 and 2026 tax years. This limitation on business credits includes the Passthrough Entity Elective Tax Credit and will include the current year credit and any credit carryforward. The carryover period for any credit not used as a result of this limitation is increased by the number of taxable years the credit was not allowed. As an alternative, taxpayers can make an irrevocable election in a tax year in which the $5 million credit limitation applies to treat the suspended credit amounts as a refundable credit. The refundable credit is claimed equally (20% per year) over a five-year period beginning with the third taxable year after the tax year the election is made.