California Law Ends NOL Suspension and Expands PTE Tax Election

On February 9, 2022, Governor Gavin Newsom signed CA SB 113 (SB 113) into law. The legislation shortens the suspension period for deducting net operating losses (NOL) and adopts modifications to the Pass-through Entity (PTE) tax that could be favorable to taxpayers.

SB 113 also removes the limitation on certain business credits enacted in June 2020 in response to the onset of the COVID-19 pandemic. 

NOL Limitations and Business Tax Credits Lifted

The suspension of deductions of California NOLs applied to California taxpayers with net business income of $1 million or more for tax years beginning on or after January 1, 2020, and before January 1, 2023. SB 113 decreases that suspension period by one year, making the suspension applicable for tax years beginning on or after January 1, 2020, and before January 1, 2022.

SB 113 also removes the former limitation on the use of business tax credits to offset a maximum of $5 million of tax for tax year 2022. 

SB 113’s restoration of the deductibility of NOLs and removal of the limitation on credits could significantly impact some tax liabilities for Californians paying taxes for 2022.

One potential ramification of NOL deductions is the possibility of owing for the Alternative Minimum Tax (AMT) due to an existing limitation on using NOLs when computing AMT.

Favorable Elective PTE Tax and Tax Credit Program Changes

Eligibility will be expanded to elect the PTE tax and the bill makes technical corrections including the following:

  • Makes PTEs with one or more owners that are partnerships eligible to elect to pay PTE tax
  • Disregarded limited liability companies owned by individuals may claim the PTE credit.
  • Guaranteed payments defined by Internal Revenue Code Section 707(c) qualify for the PTE tax credit.
  • Credit for PTE tax paid and passed through to owners may reduce their regular tax below tentative minimum tax for taxable years beginning on or after January 1, 2021.
  • PTE credit to be applied after applying credits for taxes paid to other states for tax years beginning on or after January 1, 2022

Additional Relief Provisions

SB 113 also conforms California’s treatment of payments received by taxpayers from the federal Restaurant Revitalization Fund and from the federal Shuttered Venue Operators Grant program to the federal tax treatment of such payments, allowing for exclusion of the payments from gross income and deductibility of expenses paid with the funds.   

We’re Here to Help

To learn more about how this legislation could affect your taxes, please contact your Moss Adams  professional for assistance.

You can also visit our State & Local Tax Services for more resources.

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