California Assembly Bill AB 85 will limit the amount of tax credits a business can claim AND suspend any Net Operating Loss deductions for tax years 2020 - 2022. AB 85 became law via the passage of the 2020 Budget Act on June 29, 2020. This one is a bit sneakier than some of the other proposals out there (such as AB 1253 and Proposition 15). The tax increases affect businesses and business owners in the following ways:
Tax Credits are Limited to $5 Million per Taxpayer per Year for 2020 – 2022.
- This limit applies to both individuals and corporations. Further, corporations required to file in a combined group will be considered a single corporation for purposes of this limitation. In other words, the combined tax credits for all of those corporations will be limited to $5 million per year.
- On the positive side, AB 85 allows the credits to carryover to future years. And, the carryover period will be increased by the number of years it was disallowed because of this law.
- This affects all tax credits except low-income housing credits and personal (non-business) tax credits. This means popular tax credits like the R&D credit, Enterprise Zone and hiring credits and California Competes Credit will be impacted.
Net Operating Losses (NOLs) are Suspended for 2020 – 222
- For those with $1 million or more of taxable income, NOLs will be suspended. In other words, you will not be able to reduce your taxable income by NOLs accumulated in previous years.
- Dark Horse Observation: because of this, you may want to amend prior tax returns to carryback NOLs because you will not be able to utilize them again until 2023 OR until your taxable income drops below $1 million.
- The carryforward period will be extended by the number of years that the deduction is suspended.
Because many taxpayers don’t fully understand how Net Operating Losses work, and may be confused by the language of how tax credits will be limited, AB 85 slipped under the radar for a lot of folks. So, like I said, this one is a bit sneaky. In and of itself, it probably wouldn’t have raised too many eyebrows. Unfortunately, it's part of a larger string of legislation that is burdening the California taxpayer during an economically tenuous time.
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