The California Chamber of Commerce and a coalition of business groups are urging state legislators to restore the net operating loss deduction and business incentive tax credits that were suspended and capped by AB 85 last year.
The action was taken as part of last year’s strategy to close an estimated $54.3 billion budget deficit — a deficit that never came to fruition.
In a letter submitted to members of the Legislature last week, the coalition pointed out that sunsetting the suspension and cap would assist employers in their economic recovery and incentivize them to remain in California.
Help Needed to Offset Pandemic Losses
In July 2020, the Legislature approved Governor Gavin Newsom’s proposal to suspend the use of personal and business net operating loss deductions (NOLs), and limit the use of existing business incentive tax credits to offset their tax liability for years 2020–2022. This proposal was intended to raise approximately $9.2 billion in revenue to help address the anticipated budget shortfall expected as a result of the COVID-19 pandemic.
While the tax increases were painful for employers, they understood that the state’s pandemic response required everyone to pitch in, and employers willingly played their part.
In 2021, however, California is not even close to experiencing a budget shortfall. In fact, according to Governor Newsom, California’s budget contains a record $76 billion surplus. California’s revenues have triggered the State Appropriations Limit (Proposition 4), which could require the state to return revenue in excess of the limit to taxpayers. Accordingly, the tax increases adopted last year as emergency measures are no longer needed, the coalition argues.
“Businesses should be allowed to immediately utilize NOLs and earned tax credits to offset any harm they have suffered as a result of this pandemic, and to encourage employers who are considering leaving to stay,” the coalition states in the letter.
Moreover, the NOL suspension is causing even greater financial strain for employers who have suffered staggering losses over the past year and have no way to offset their revenue declines.
“Struggling businesses need help now—not in several years when the 2020 budget’s carryback provisions take effect,” the coalition said.