Navigating Changes in California's Tax Code: Key Updates for Small Business Owners in 2024
As 2024 unfolds, small business owners in California must be aware of significant changes to the state’s tax code that could impact their financial strategies. The recent legislative updates, particularly Senate Bills 167 and 175, bring notable alterations that could affect how businesses manage their taxes and plan for the future.
1. Suspension of Net Operating Loss Deductions (NOLs)
One of the most critical changes is the suspension of Net Operating Loss deductions for businesses and individuals with California-apportioned income exceeding $1 million. This suspension will be in effect from 2024 through 2026, meaning businesses can no longer use NOLs to offset their taxable income during this period.
The implications of this suspension are significant, especially for businesses that have relied on these deductions to mitigate their tax liabilities. However, there is some relief: any NOLs that are denied due to this suspension will have their carryover period extended by one to three years, depending on when the losses were incurred.
2. Limitations on Business Tax Credits
In conjunction with the suspension of NOLs, SB 167 introduces a cap of $5 million on the total amount of business tax credits that individuals or corporations can utilize during the same timeframe (2024-2026). This limitation applies to a range of credits that businesses might have previously leveraged to reduce their tax burden. While some credits, such as low-income housing credits, are exempt, many others will be affected.
Business owners will need to plan strategically to accommodate these new limitations. Evaluating which credits are most beneficial and how they align with business goals will be crucial for financial planning.
3. Potential for Refunds Under Senate Bill 175
Amid the challenging landscape created by SB 167, Senate Bill 175 offers a silver lining. This legislation allows businesses that are subject to the credit cap to request a future refund of credits that would typically be used to offset tax liabilities during the limitation period. This option can provide much-needed cash flow relief for businesses that anticipate needing these credits to manage their tax burdens effectively
Conclusion
The changes in California’s tax code present both challenges and opportunities for small business owners. The suspension of NOLs and the new limitations on tax credits could create a more complex tax environment, necessitating a reevaluation of tax strategies. Consulting with tax professionals will be essential to navigate these complexities and to take full advantage of any relief options, such as those provided under SB 175.
To stay updated on these changes and explore more in-depth information, business owners can refer to resources like BDO and WilmerHale. Being proactive and informed will be key to successfully navigating the evolving tax landscape in California.
