2020-2021 Budget
Assembly Bill 85, (“A.B. 85”) included in the signed 2020-2021 budget, provides for the following California tax changes:
- Net Operating Losses (NOLs) – NOLs are suspended for taxpayers with business income or adjusted gross income of $1 million or more for tax years beginning on or after January 1, 2020 and ending on or before December 31, 2022. Like prior NOL suspensions in California, the legislation allows for an extended carryover period to take into account the tax years in which taxpayers were unable to utilize the losses.
- Business Tax Credits – Business incentive credits, with the exception of low-income housing credits, may not offset more than $5 million of tax for tax years beginning on after January 1, 2020 and ending on or before December 31, 2022. Similar to the NOL suspension, the legislation allows for an extended carryover period to take into account the tax years in which taxpayers were unable to utilize the credits.
Reed Smith Insights1
Like prior NOL suspensions in California (2002-2003 and 2008-2011), A.B. 85 extends the standard NOL carryforward period due to suspended NOLs. For the prior suspensions, the FTB took the position that the carryforward period was only extended to the extent that a taxpayer’s NOL deduction would have produced a tax benefit during a year covered by the suspension.2 Assuming the FTB takes a similar position for the 2020-2022 suspension, we believe that the FTB’s stance is contrary to the statute. A.B. 85 simply provides that if the deduction is denied as a result of the statute, then the loss carryover period is extended based on the years in which the deduction is denied. A.B. 85 does not include a provision limiting the extension to taxpayers that would have benefitted from the NOL in a tax year covered by the extension. Consequently, affected taxpayers should take the position that all California NOLs are extended one year for each year of the upcoming suspension period.
False Claims Act Expansion – Take Two3
On June 10, 2020, the California State Assembly passed Assembly Bill 2570 (“A.B. 2570”), a bill that would amend the California False Claims Act4 (“CFCA”) to include claims under the California Revenue and Taxation Code. A.B 2570, if passed, would take effect beginning in 2021. It is substantially similar to A.B. 1270, which failed last year in the Senate. Specifically, A.B. 2570 authorizes tax-related false claims actions if (1) the damages pled in the action exceed $200,000, and (2) the amount of reported taxable income, net income, or sales equals $500,000 or more. The bill also authorizes the Attorney General, but not a qui tam plaintiff, to obtain otherwise confidential information related to taxes, fees, or other obligations under the Revenue and Taxation Code.
Reed Smith Insight
The ambiguity of California’s tax laws would provide dangerous fuel for false claims act actions. New York and Illinois both include tax claims in their respective state false claims act statutes and taxpayers in those states have been hard hit by plaintiff law firms seeking out whistleblowers and bringing frivolous lawsuits.
While A.B. 1270 died in the Senate during the 2019 legislative session, California was in a much different economic landscape last year compared to this year. Given the impact of COVID-19 on California’s economy and tax revenue, the state legislature may be more inclined to pass revenue-raising legislation this year. California taxpayers should begin to think about potential CFCA exposure and keep in mind that a plaintiff may bring a CFCA claim up to 10 years from the date of the violation, well beyond California’s standard tax statute of limitation for tax assessments.
- See our prior article on California NOL opportunities at reedsmith.com.
- FTB Legal Ruling 2011-04 (Sept. 23, 2011).
- See our prior article on A.B. 1270, the failed predecessor bill to A.B. 2570 in this Law360 PDF.
- Cal. Govt. Code Sections 12650-12656.
Client Alert 2020-431
