Taxpayers may be able to extend their NOL carryover period by up to seven years
In California, the standard rule for NOL carryovers is that they can be carried forward for 10 years2 following the loss year for losses generated in 2000 through 2007 and for 20 years following the loss year for losses generated in 2008 and forward.3 However, as a part of the state’s 2002-2003 budget, California suspended the utilization of NOLs for tax years 2002 and 2003 and extended the carryover periods by one year for losses incurred in 2002 and two years for losses incurred before 2002.4 Then as part of the state’s 2008-2009 budget, the NOL deduction was suspended for tax years 2008 through 2009.5 A couple years later, as a part of its 2010-2011 budget, California extended the suspension of the NOL deduction through 2011.6 Although the Legislature disallowed NOL deductions for the 2008-2011 years, similar to the 2002-2003 NOL suspension, the 2008-2011 NOL suspension was supposed to be just a matter of timing. The carryover period for NOLs suspended for tax years 2008 through 2011 was extended by four years for losses incurred in years prior to 2008, by three years for losses incurred in 2008, by two years for losses incurred in 2009, and by one year for losses incurred in 2010.7
In 2020, the California Legislature once again turned to NOL suspensions, this time to combat projected budget deficits resulting from the COVID-19 pandemic.8 As a part of the state’s 2020-2021 budget, California suspended the use of NOLs for taxable years 2020 through 2022.9 Similar to the earlier suspensions, California extended the carryover periods by three years for losses incurred in taxable years before 2020, two years for losses for losses incurred in 2020, and one year for losses incurred during 2021.10
While the extended carryover period rules appear straightforward, the Franchise Tax Board’s (FTB’s) position is that a taxpayer is not afforded an extended carryover period unless the NOL deduction would have produced a tax benefit were it not for the suspension.11 Under Legal Ruling 2011-04, the taxpayer must essentially “test” each NOL carried into the suspension period. If the NOL would have produced a tax benefit in the suspension period, were it not for the suspension, the carryover period for that NOL is extended. If not, the NOL is not extended. In other words, the taxpayer must have sufficient income in the suspension year so that it could have used the NOL, were it not for the suspension, in order to extend the NOL.
The FTB’s “tax benefit/income testing” limitation on the statutory NOL extension provisions is invalid because:
- The “tax benefit/income testing” limitation is not authorized by, and conflicts with, the plain language of the statute; and
- The “tax benefit/income testing” limitation is contrary to the legislative intent of the statute, because the Legislature intended that the suspension be purely a timing shift to address budget shortfalls.