United States: Here we go again - California Governor Newsom proposes temporary tax measures to address budget shortfall

In brief

Governor Gavin Newsom issued revisions to his budget proposals for the state's fiscal year ending June 2021. This "May revision" is an annual opportunity for the California governor to revise his initial budget proposals from the previous January. This year, Governor Newsom used the May revision to propose potentially significant changes for California taxpayers to help fill the budget shortfall resulting from COVID-19's economic impact. 


Contents

Governor Newsom's May revision includes a proposal to temporarily suspend utilization of net operating losses. If adopted, this suspension would prevent taxpayers with income of $1 million or more from utilizing NOLs for taxable years beginning between January 1, 2020 and December 31, 2022. Of course, suspending NOL utilization is nothing new in California. The state took the same measure in the aftermaths of the dot-com bubble (2002-2003) and the great recession (2008-2011). It's notable that prior suspensions included extensions of the NOL carryover period. But the FTB interpreted those carryover extensions narrowly to allow an extension only when a taxpayer could not have otherwise utilized the NOLs. We believe this interpretation is incorrect. Nonetheless, the governor's proposal would likely present similar issues again.

The governor's revised budget also calls for a cap of $5 million on the utilization of business tax incentives. This cap would apply to important credits that include, among others, the R&D credit, the California Competes Tax Credit, the low-income housing credit, and motion picture production credits. Many credits subject to the limitation would be carried over into the next taxable year. Of course, this limitation would have an effect of targeting in-state companies that create needed jobs in these times of economic uncertainty.

The process will now turn to the Legislature, which has until June 15 to pass a budget. It is unclear at this point whether the Legislature will pass the governor's proposed tax changes, in full or in part.

Contact Information

© 2021 Baker & McKenzie. Ownership: This site (Site) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms, including Baker & McKenzie LLP). Use of this site does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All information on this Site is of general comment and for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulation and practice are subject to change. The information on this Site is not offered as legal or any other advice on any particular matter, whether it be legal, procedural or otherwise. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any information provided in this Site. Baker McKenzie, the editors and the contributing authors do not guarantee the accuracy of the contents and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this Site. Attorney Advertising: This Site may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Site may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. All rights reserved. The content of the this Site is protected under international copyright conventions. Reproduction of the content of this Site without express written authorization is strictly prohibited.