California’s Acting Governor Eleni Kounalakis and Governor Gavin Newsom signed Senate Bill (SB) 167 and SB 175 into law on June 27, 2024 and June 28, 2024, respectively. These bills contain various statutory changes necessary to implement the Budget Act of 2024 and to implement the 2024–25 budget. Changes to the corporate income tax are detailed below and include net operating loss (NOL) suspensions, limits on tax credit usage, and apportionment modifications in response to the recent Microsoft case.
NOL Suspension
For tax years beginning on or after January 1, 2024 and before January 1, 2027, SB 167 suspends California NOL deductions for taxpayers with net business income or modified adjusted gross income of $1 million or more. Suspended NOLs will be granted an additional carryforward year for each year of suspension. NOL deductions can otherwise continue to be carried forward for up to 20 years in California.
Under SB 175, the NOL suspensions in 2025 and 2026 will be paused in each of those years if the Director of Finance determines the general fund money over the multiyear forecast is sufficient without the NOL suspension or tax credit limitation (described below).
Limits on Tax Credit Usage
Under SB 167, for tax years beginning on or after January 1, 2024 and before January 1, 2027, the total of business tax credits utilized is limited to $5 million. This limitation is applied on a combined group basis, meaning the business tax credits cannot reduce the combined total tax of all members of the combined reporting group by more than $5 million. Tax credits unable to be utilized due to the limitation will have the carryforward period extended one year for each year the credit is impacted by the limitation.
However, SB 175 allows taxpayers to make an irrevocable annual election to receive a refundable tax credit in the amount of the credit over the $5 million limitation. Taxpayers making the election will claim an annual refundable credit amount, over a five-year period, beginning the third taxable year after the election is made, equal to 20% of the qualified tax credits that otherwise would have been available to the taxpayer, barring the limitation. The refundable credit would be allowed as a credit for the taxable year, as specified, e.g., 2027, and any balance after the credit is applied would be paid to the taxpayer as a refund.
Similar to its effect on the NOL suspension, SB 175 also pauses the limit on tax credit utilization in 2025 and 2026 if the Director of Finance determines the general fund money over the multiyear forecast is sufficient without the NOL suspension (described above) or tax credit limitation.
Apportionment Modifications
In its decision in the appeal by Microsoft Corporation & Subsidiaries earlier this year, the California Office of Tax Appeals ruled the taxpayer was allowed to include in its California sales factor receipts attributable to deductible “qualifying dividends.” To overturn this taxpayer-favorable result, SB 167 adds a new statutory provision, California Revenue and Taxation Code Section 25128.9. Now, when a corporation receives income that is “not included in” net business income, the income is also excluded from the California sales factor. SB 167 defines “not included in” net business income as income from transactions and activities that are not included in net income subject to apportionment for any reason, including but not limited to exclusion, deduction, exemption, elimination, or nonrecognition.
The new §25128.9 also includes a specific statement of legislative intent that the section “does not constitute a change in, but is declaratory of, existing law” and is a “clarification.” In addition, §25128.9 is effective for tax years “beginning before, on, or after the effective date of the act adding this section.” As a result, SB 167 could negatively impact taxpayers with refund claims pending with the Franchise Tax Board that were filed following the Microsoft case.
For more information about these changes or if you have questions, please reach out to a professional at Forvis Mazars.