California Limits Business Credits to $5 Million Per Year

Overview

For the tax years starting January 1, 2024, and ending December 31, 2026, California is limiting the amount of business tax credit a taxpayer can use each year to $5 million. This applies to both corporate and personal income taxes.

Key Details:

1. Business Credit Cap
   • Each year, a taxpayer can use only up to $5 million in business tax credits. This applies whether the taxpayer is an individual or part of a combined group of businesses.
   • If a taxpayer has more than $5 million in credits, they can't use the excess credits this year but can carry them over to use in future years.
   • This limit does not affect some credits, like low-income housing credits and certain personal income tax credits.
2. Option for Refundable Credits
   • Taxpayers who can't use all their credits due to the $5 million cap have an option: they can elect to receive a refundable credit for the excess amount.
   • If they choose this option, they'll receive the excess credits in installments. Specifically, they'll get 20% of the extra credits each year, starting three years after they make the election, and spread out over five years.
   • This election must be when they file their original tax return, and it cannot be changed once made.
3. Special Rules for Film Production Credits
   • For film production credits, if a taxpayer has excess credits above $5 million, they can use them when the limitation period ends, beginning in 2027.

We know these new limitations can impact your business. Contact Cambaliza McGee LLP so that we can walk you through the options available to your business.