In a significant legislative update, California has passed a new law that directly affects the financial landscape for small business owners and solopreneurs within the state. Starting January 1, 2024, net operating loss (NOL) deductions will be suspended for taxpayers recording over $1 million in net income. This suspension, slated to last until January 1, 2027, follows a previous temporary suspension from 2020 to 2021. Thus, for California businesses, only the years 2022 to 2023 remain eligible for the NOL deduction.
The implications of these changes extend beyond immediate tax liabilities. To counterbalance the suspension, the law extends the carryforward period for NOLs. Losses incurred before January 1, 2024, can now be carried forward an additional three years. For losses arising in the following two years, the extension reduces incrementally—two years for losses from 2024 and one year for those from 2025.
In light of ongoing financial challenges and the state’s economic health, the legislation also includes a revenue trigger provision. This clause could potentially reinstate the NOL deduction for 2025 and/or 2026, contingent on the state’s general fund being deemed sufficient by May 14 of each respective year. The decision will also consider the fiscal impacts of the NOL suspension and credit limitation.
Further compounding the challenges for California’s small businesses are cutbacks on tax credits. From 2024 to 2026, the total amount of business tax credits that can offset California tax liabilities is capped at \$5 million, with specific exceptions like the Low-Income Housing Tax Credit and the Pass-Through Entity Elective Tax Credit. Credits exceeding this cap are to be carried forward, and those subject to time limits will receive an extension based on when they are freed from the $5 million limitation.
These legislative adjustments come at a critical time when many small businesses and solopreneurs are still navigating the turbulent economic waters post-pandemic. The extended carryforward periods provide some cushion, but the initial hit might strain those who rely heavily on these financial mechanisms to manage fluctuations in annual profits and losses. While the revenue trigger offers a glimmer of hope for relief in the near future, the landscape remains uncertain, urging businesses to closely monitor their financial and tax planning strategies.
