CM Blog

California Temporarily Suspends NOL Deductions

December 05, 2024

The State of California recently decided to pause *net operating loss* (NOL) deductions for businesses and individuals for 2024, 2025, and 2026. This means companies and individuals with losses cannot use these deductions to lower their state taxes during this period, with a few exceptions.

Background on NOL Deductions

NOL deductions let taxpayers carry losses from previous years to offset future taxable income, reducing their tax bills.
Federal and California laws have different rules for calculating and applying NOL deductions. Federal law typically limits NOL deductions to 80% of taxable income for losses from tax years starting after December 31, 2017. California, however, does not follow this limit.
Certain types of businesses in California, like small or new businesses, or those in specific zones (e.g., enterprise zones, local agency military base recovery areas, or areas affected by particular issues like Pierce's Disease in farming), have special NOL rules.

Key Changes Under the New Law

For tax years from January 1, 2024, to January 1, 2027, NOL deductions are mostly suspended.
*Exceptions*: Taxpayers with annual income below $1 million can still use NOL deductions.
To make up for the pause, California will extend the period to carry forward these NOLs:
- By *1 extra year* for losses from 2025.
- By *2 extra years* for losses from 2024.
- By *3 extra years* for losses from before 2024.

Possible Early End to Suspension

This suspension could end early if California meets certain revenue goals.
For 2025 and 2026, the suspension won’t apply if there’s enough state revenue and the annual budget includes legislation to skip the suspension.

In essence, California is temporarily suspending these tax deductions to help with its budget. However, it allows a few exceptions and may end the suspension early if its finances improve.