In 2020, the California Legislature suspended the use of NOLs and capped business tax credit usage at $5 million for tax years 2020, 2021, and 2022 to combat projected budget deficits resulting from the COVID-19 pandemic.2 Now, two years later, the California Legislature enacted SB 113, which includes an early termination to the NOL suspension and removes the $5 million limit on the usage of business tax credits for the 2022 tax year.3 Taxpayers may now deduct NOLs and utilize business tax credits without the cap on their 2022 tax return.
In addition to the restored NOLs and the removal of the credit cap, SB 113 made several updates to the PTE tax credit. When Assembly Bill 150 (AB 150) was signed into law on July 16, 2021, it established the PTE tax credit scheme, which was intended to function as workaround to the federal income tax state and local tax (SALT) deduction cap enacted as part of the 2017 Tax Cuts and Jobs Act (“TCJA”). AB 150 limited the benefit of SALT cap workaround to certain situations. SB 113 expands the definition of qualified taxpayers, qualified income, and expands the type of taxes that taxpayers may offset with the PTE tax credit. First, SB 113 allows a taxpayer to utilize the PTE tax credit to reduce it tax liability below its tentative minimum tax.4 Further, SB 113 updated the definition of "qualified entity" to include a pass-through entity that has a partnership as an owner and updated the definition of “qualified taxpayer” to include taxpayers that are single-members of a limited liability company that is disregarded for federal tax purposes and meets specified criteria.5 Additionally, guaranteed payments, as defined by IRC Section 707(c), are now included in the definition of “qualified net income,” and thus qualify for the credit. All changes noted above will apply retroactively to tax year 2021.
Finally, effective for tax years beginning on or after January 1, 2022, the PTE tax credit is required to be applied against the net tax after credits for taxes paid to other states.6 For tax year 2021, the PTE tax credit is applied against the net tax before credits for taxes paid to other states.7
Taxpayers may be able to extend their NOL carryover period by up to *six* years
In a recent alert, we discussed how some taxpayers may be able to extend the carryover period for their NOLs by up to seven years. Given the early termination of California’s NOL suspension, taxpayers will likely have a one year shorter maximum extension period, meaning there is now a maximum additional carryover of six years. Thus, the carryover period of California NOLs carried forward into the suspension years should be extended as follows: