California Differences - Net Operating Loss
The California NOL is generally figured the same way as the Federal NOL, albeit in most cases with different numbers due to the numerous federal-California differences.
NOL Deduction Suspensions
Tax years beginning on or after January 1, 2024, and before January 1, 2027: SB 167, signed into law June 27, 2024, provides that no NOL deductions will be allowed, except for taxpayers with net business income or modified AGI of less than $1 million for the taxable year.
The carryover period for an NOL deduction disallowed by this provision is extended by:
-
1 year for losses incurred in 2025
-
2 years for losses incurred in 2024, and
-
3 years for losses incurred before 2024.
However, SB 175 (signed June 29, 2024) provides that for years 2025 and 2026 the disallowance of the NOL deduction included in SB 167 would not apply if the Director of Finance determines that General Fund money over the multiyear forecast is sufficient without the revenue impact of the NOL suspension (and certain credit limitations), and there is legislation in the annual Budget Act not applying those provisions. SB 175 does not impact the NOL suspension and business credit limitations for the 2024 tax year.
Tax years 2020 and 2021*: NOL deduction suspension will prevent certain businesses from applying their NOLs to deduct against taxable income during tax years 2020 and 2021*. The carryover period for an NOL deduction disallowed by this provision is extended by:
-
1 year for losses incurred in 2021
-
2 years for losses incurred in 2020, and
-
3 years for losses incurred before 2020.
*The suspension was originally through 2022, but SB 113, signed into law on February 9, 2022, repealed the suspension for 2022.
For both suspension periods: The NOL suspension does not apply to a taxpayer with a net business income or modified AGI of less than $1,000,000 for the taxable year. For this purpose, “business income” includes:
-
Income from a trade or business, whether conducted by the taxpayer or by a passthrough entity (partnership or S Corp) owned directly or indirectly by the taxpayer.
-
Income from rental activity.
-
Income attributable to a farming business.
“Modified adjusted gross income” in this case means the amount of federal AGI determined without regard to the net operating loss deduction.
No TCJA Conformity for 2018 – For 2018 California still allowed carrybacks and limited the carryover to 20 years and generally conformed to the Pre-TCJA federal NOL rules.
Some TCJA Conformity for Years After 2018 - For NOLs occurring in taxable years beginning after December 31,
2018, AB 91 (signed by the governor 6/27/2019) repeals the 2-year carryback period. California continues to allow a 20-year carryover period and has not adopted the federal rule limiting the NOL deduction to 80% of the carryover year’s taxable income. Thus, 100% of the unused CA NOL is carried over.
No CARES Act Conformity - California has not conformed to the NOL changes included in the CARES Act.
Impact of Prior Suspensions on NOL Carry Forward
In some years before 2015, because of the severe state revenue deficits, the NOL carry forwards were suspended for some taxpayers and only a percentage of a carryback was allowed on their California returns. As a result, the carry forward period was extended by two years for losses incurred before January 1, 2002, and by one year for losses incurred in 2002. Although the carry forward period for all post-2007 NOLs remains 20 years, as a result of the NOL suspension during the 2008 through 2011 tax years, the carry forward period for NOLs suspended during this period is extended as follows:
-
one year for losses incurred during the 2010 taxable year.
-
two years for losses incurred during the 2009 taxable year.
-
three years for losses incurred during the 2008 taxable year; and
-
four years for pre-2008 taxable year losses incurred.
NOL Carrybacks
For California returns, NOL carrybacks are only allowed for NOLs incurred after 2012 and before 2019. As a result, taxpayers were first able to claim an NOL carryback on an amended return for the 2011 tax year (a carryback of an NOL from 2013). The NOL carryback was phased in over a three-year period. Consequently, only a 50% NOL carryback is allowed for NOLs incurred in the 2013 taxable year, a 75% NOL carryback is allowed for NOLs incurred in the 2014 taxable year, and 100% of the NOL may be carried back for NOLs incurred after taxable year 2014 and through year 2018. For information related to NOL carryback and carry forward in years before 2015, see the table in the instructions for FTB Form 3805V.
Election to Waive NOL Carryback
Any taxpayer entitled to a carryback period pursuant to IRC Section 172(b)(3) could make an irrevocable election to relinquish/waive the entire carryback period for California purposes with respect to an NOL incurred in taxable years 2013 through 2018. By making the election, the taxpayer elected to carry an NOL forward instead of carrying it back to the previous two years. The election to waive the carryback could be made separately for California and federal.
The last year for which this election applies for California is 2018, and to be valid the election had to be made by the due date (including extensions of time) for filing the taxpayer’s tax return for 2018.Thus, October 15, 2019, generally was the last day for making the election. Once made, the election is irrevocable.