California Legislature Passes AB 85 and Suspends the Usage of New-Operating Losses

California’s Legislature recently passed AB 85, a budget bill that, in part, suspends the usage of net-operating losses and restricts the utilization of business tax credits, including the research credit. The Governor signed the bill into law on June 29, 2020.

The new law suspends net operating loss deductions for tax years beginning on or after January 1, 2020, and before January 1, 2023. The suspended losses will be carried forward to tax years after this period. Additionally, the carry-forward period is extended based on the number of years it was not allowed. This provision applies to any company with more than $1 million in income subject to tax, net business income, or modified adjusted gross income depending on the entity type.

The law also limits the total utilization of most business tax credits to no more than $5 million in one year, including the CA research credit, subject to the standard ordering rules. Credits over this limitation will be treated as carry-forward amounts. The carry-forward period will likewise be extended by the number of taxable years the credit was not allowed.