California’s Legislature has passed a significant budget package for the fiscal year starting July 1, 2024. This $211 billion general fund budget includes notable tax provisions that may impact businesses operating in the state. 

Key tax changes

Net operating loss (NOL) deduction suspension 

• Applies to C-Corps for tax years 2024 to 2026. 
• Affects businesses with net income or modified AGI in excess of $1 million. 
• Extends carryover periods by one to three years.

Business tax credit usage cap 

• Limits annual credits to $5 million for 2024 to 2026. 
• Extends carryover periods for unused credits. 
• Future legislation may allow future refunds on unused credits.

Other significant changes  

• Eliminates certain oil and gas industry tax subsidies. 
• Extends cannabis business expense deductions until 2030. 
• Suspends sales tax bad debt deduction for retailers. 
• Conforms to 2023 federal changes on charitable conservation easements. 
• Grants authority to postpone tax filing deadlines for disasters.

These changes aim to address California’s $46.8 billion deficit. They’re expected to increase state revenue by over $5 billion annually. 

Impact on businesses 

These provisions may significantly affect your tax strategy if your business: 

• Has substantial NOLs or California tax credits. 
• Files as water’s-edge with foreign dividend income. 
• Operates in the oil and gas sector. 
• Applies the sales tax bad debt deduction as a retailer.

The budget also proposes to reverse a recent ruling that granted Microsoft Corp. a $94 million income tax refund. This could impact other taxpayers with similar claims. 

Next steps for businesses 

Consider reviewing your tax planning strategy: 

• Make prospective accounting method elections. 
• Evaluate refund claims or filing positions.

A separate bill addressing K-12 education funding (S.B. 154) has also passed. This may indirectly affect businesses through changes in state spending priorities. 

Stay informed 

These changes are complex and far-reaching. Seek professional guidance to understand their impact on your business. Our tax professionals can provide personalized advice on navigating California’s changing tax landscape. 

For more information or to discuss these changes, contact us or your BPM tax representative.