In June of last year, the State of California enacted a temporary suspension of the Net Operating Loss (NOL) deduction. This suspension is part of a broader effort to increase state revenue and address budget constraints. Here is what taxpayers need to know about this meaningful change.
What is a NOL?
A NOL occurs when a taxpayer’s deductions and losses exceed their income for a tax year. Typically, these losses can carry forward to offset taxable income in future years, reducing the taxpayer’s overall tax liability.
Duration
The suspension applies to taxable years beginning on or after January 1, 2024, and before January 1, 2027. The suspension may sunset early if certain state revenue targets are met.
Income Thresholds
The suspension does not apply to individual taxpayers with net business income or modified adjusted gross income of less than $1 million, or to corporate taxpayers with income subject to California taxation of less than $1 million.
Extended Carryover Period
For any taxpayer whose NOL deduction is disallowed due to the suspension, the maximum carryover period will be extended by one year for losses incurred in 2025, two years for losses incurred in 2024, and three years for losses incurred prior to 2024.
Both individual and corporate taxpayers affected by the NOL suspension should consider revisiting their estimated tax payments and consulting with a tax professional to navigate this change effectively.
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