As noted in our previous blog, prior to COVID-19, California was projecting a budget surplus of $5.6 billion for the 2020-2021 fiscal year with March actual revenues coming in $1.35 billion above projections. However, the COVID-19 pandemic changed all that as businesses were forced to close temporarily and lay off or furlough employees, and the entire U.S. economy soon came to an abrupt halt. The resulting recession has significantly changed the economic landscape, and California is now projecting a budget deficit of about $54 billion!
Due to the projected budget deficit, Governor Gavin Newsom signed a bill on June 29, 2020, to increase revenue by $9.2 billion and close the budget gap with measures including but not limited to:
Newsom and lawmakers are planning to update the budget in August after tax returns are filed by July 15. It is unclear at this time if further tax impacts will be made.
The recently enacted AB-85 provides a temporary suspension of NOLs for tax years beginning on or after January 1, 2020, and before January 1, 2023, and applies to individuals with an adjusted gross income of $1 million or greater and corporations with income subject to tax of $1 million or greater for the taxable year.
Like previous years when CA suspended NOLs, the bill extends the NOL carryover period for losses incurred in taxable years beginning before January 1, 2022.
Unlike prior NOL suspension years, the bill does not limit the extended carryforward period to only those losses that could have been utilized in the corresponding suspended year. The silver lining here is taxpayers will at least still be able to utilize CA NOLs on their 2019 returns, thereby allowing for some 2020 state and local tax (SALT) planning!
NOTE: CA conforms to the TCJA’s elimination of NOL carrybacks for tax years beginning after 1/1/2018 but does NOT conform to the TCJA’s unlimited carryforward, the TCJA’s 80% NOL or the other related CARES Act NOL modifications.
In addition to the suspension of NOLs, the budget bill limits credit utilization to $5 million per year. For corporations filing a combined report, the $5 million limitation is applied to the aggregate group income. This applies to credits otherwise allowable under any provision of Chapter 3.5 (starting with Section 23604), which includes the California R&D credit and the California Competes Credit. It does not apply to any credits for which an irrevocable election was made to use against sales and use tax nor to the credit for low-income housing. The carryover will be extended, like the NOLs, for any credit restricted by a carryover period. The $5 million limitation also applies to several credits available to individuals.
As with the NOL suspension, the silver lining is that the amendment does not impact taxpayers’ ability to fully utilize all available CA credit without restriction on their 2019 California tax returns and highlights the importance of SALT planning for the tax year 2020 and beyond.
The bill also allows for several other measures, including the following:
Now is the time for all California taxpayers, especially those expecting to utilize CA NOLs and/or credits to reduce future CA tax liabilities, to consider significant SALT planning. A few areas of considerable opportunity include:
In addition, for ASC 740 purposes, be aware that if your quarter end or year end occurred prior to June 29, then this will impact the following quarter-end or year-end provision.
If you have any additional concerns or issues, reach out to Alex Thacher, Partner-In-Charge of our State and Local Tax Practice.
July 01, 2020
