February 9, 2022
California governor signs bill restoring NOLs and R&D credits for 2022, modifies elective pass-through entity tax
On February 9, 2022, California Governor Newsom signed into law 2022 CA SB 113 (enrolled version) (SB 113), which includes business tax law changes that were part of the governor's 2022-23 budget proposal. The new law shortens the previously enacted suspension on the use of net operating losses (NOLs) and prior limits on the use of business tax credits, including the research and development (R&D) credit.
Under Cal. Laws 2020, ch. 8 (2020 CA AB 85) the NOL suspension applied to California taxpayers with net business income of $1 million or more and the amount of business tax credits that could be used in a year was limited to $5 million for the tax years 2020, 2021 and 2022. (see Tax Alert 2020-1691). SB 113 restores NOLs and removes the limit on business tax credits for the 2022 tax year.1 In addition to the R&D credit, other credits for which the limit has been removed include the jobs tax credit, the California competes credit, motion picture production credits (including the motion picture production credits as applied to California sales and use tax), and insurance tax credits.
SB 113 also modifies the state's elective PTE tax law by:
Unless otherwise noted, the changes to the elective PTE tax law apply to tax years beginning on or after January 1, 2021, and before January 1, 2026.
SB 113 conforms California's income tax treatment of payments from the federal Restaurant Revitalization Fund and grants from the federal Shuttered Venue Operators Grant program to the federal income tax treatment of these payments. Thus, these payments are excluded from gross income and taxpayers may deduct business expenses paid with these funds (except for taxpayers that are "ineligible entities").2
SB 113 appropriates $150 million in funding for remaining eligible waitlisted applicants for the California Small Business COVID-19 Relief Grant Program.
The restoration of the use of NOLs and full business credit utilization for tax year 2022 may significantly impact companies that rely on these tax attributes to offset California taxable income. Restoration may also affect the computation of such companies' estimated tax payments for the 2022 tax year, as well as other California tax planning and compliance considerations for that year.
The legislation is quite responsive to questions that have arisen on applying the PTE tax to electing PTEs and their owners and also provides welcome relief to taxpayers and their tax advisors.
Proposed tax law changes that were in the Governor's 2022-23 budget proposal but not addressed in SB 113 include proposed new credits for qualified California-headquartered companies investing in activities and technologies that mitigate climate change and those opting to develop green energy technologies. Likewise, proposals to assist small businesses by waiving fees for new businesses and providing additional funding for existing grant programs were not included in this recently enacted legislation. These provisions can still be considered during California's regular budget process, which will be ongoing through June (see Tax Alert 2022-0178).
EY will continue to monitor all the California budget proposals that affect taxpayers and will issue additional Alerts on these and any other proposals as they move through the legislative process.
1 SB 113 restores NOL and credit utilization by amending the relevant language in California Revenue and Taxation Code Sections 23036.3 and 24416.23 from "beginning on or after January 1, 2020, and before January 1, 2023" to "beginning on or after January 1, 2020, and before January 1, 2022."
2 An "ineligible entity" is defined as a publicly traded company or a taxpayer that did not experience at least a 25% reduction in gross receipts from the applicable quarter in 2019.