News and Insights

California Budget Bill Enacted

Tax Development Jun 27, 2024

California Budget Bill Enacted

Businesses need to be aware that their taxes in California for the 2024 and subsequent taxable years may be increased as a result of the tax laws enacted as part of the governor’s budget in California. The budget not only suspends the use of net operating losses (NOLs) but also limits the use of credits to reduce state income and franchise taxes. The oil and gas industry was not spared, as the bill repeals credits and deductions used to compute taxable income. Governor Newsom also used the budget bill to disallow the deduction for bad debts for retailer affiliates and lenders. On the heels of a favorable apportionment decision rendered by the Office of Tax Appeals (OTA), the law retroactively repeals the taxpayer-friendly ruling.

For taxpayers facing significant underpayments for the 2024 taxable year, California law protects them from the underpayment of estimated tax penalty for law changes that were enacted and operative during the same taxable year pursuant to R&TC Secs. 19136(g) (individuals) and 19142(b) (businesses). R&TC Secs. 19136(g) (individuals) and 19142(b) (businesses) were amended in 2005 to provide mandatory relief from the underpayment penalty. 

Governor Newsom signed SB 167, California’s tax-related budget provisions, on June 27, 2024. Here is a recap of the major provisions. Note that “CDTFA” means California Department of Tax and Fee Administration, “SIFT” means State Income and Franchise Taxes,” and “TYs” means taxable years.

  1. CDTFA SUT Bad-Debt Deduction – Permanently repeals the deduction for retailer affiliates and lenders starting January 1, 2025. The deduction remains in place for retailers.
  2. CDTFA “Legal Rulings of Counsel” – Exempts rulings from California’s Administrative Procedures Act (APA). The statutory definition of “legal rulings of counsel” means a legal opinion written and signed by CDTFA’s chief counsel or an attorney who is the chief counsel’s designee, addressing a specific inquiry, including an inquiry from a taxpayer or taxpayer representative, a local government agency, or CDTFA staff. Currently, the Board of Equalization’s (BOE’s) and the Franchise Tax Board’s (FTB’s) legal rulings are exempt from the APA.
  3. SIFT Business Tax Credits – Similar to the 2020-2022 TYs but with a refundable twist, business tax credits are limited. For the 2024-2026 TYs, the total of all business credits, including credit carryovers, may not reduce “tax” by more than $5 million. For taxpayers included in a combined report, the limitation is applied at the group level. The carryover period for disallowed credits is extended by the number of taxable years the credit was not allowed. This limitation does not apply to the Low-Income Housing Credit. Starting with the 2025 TY, taxpayers may elect to receive a refund of those limited tax credits.
  4. SIFT NOLs – Similar to the 2020-2022 TYs, NOLs are suspended for the 2024-2026 TYs for businesses with taxable incomes greater than $1 million. The carryover period is extended.
  5. SIFT Apportionment Formula – The Appeal of Microsoft is retroactively overturned, and the provision is “declaratory of existing law.” In Microsoft, the California Office of Tax Appeals held that a water’s-edge taxpayer that included foreign dividends, 75% of which had been appropriately eliminated, in the sales factor denominator was correct.
  6. SIFT Charitable Conservation Easements Conformity – Conforms California law with federal law relating to deductions for charitable contributions starting with the 2024 TY.
  7. SIFT Enhanced Oil Recovery Tax Credit – Repeals the credit starting with the 2024 TY.
  8. SIFT Intangible Drilling and Development Expensing – Repeals the expensing for oil and gas wells starting with the 2024 TY. There may be alternative minimum tax (AMT) implications. Also note that expensing for geothermal wells was never allowed in California.
  9. SIFT Percentage Depletion Deduction – Starting with the 2024 TY, repeals the calculation of depletion as a percentage of gross income from the property for specified natural resources, repeals the nonconformity statute relating to the percentage depletion deduction for large crude oil producers, and repeals the California credits for qualified enhanced oil recovery costs for projects located in the state. Note there may be AMT implications.
  10. SIFT Advanced Strategic Aircraft Credit (Space X) – Extends from the 2025 TY to the 2030 TY the credit’s ability to reduce regular tax below tentative minimum tax.
  11. CDTFA Underground Storage Tank Fee Savings Clause and Cost Reimbursement – CDTFA may continue specific requirements related to the Underground Storage Tank Cleanup Trust Fund, after other provisions of the Barry Keane Underground Storage Tank Cleanup Trust Fund Act of 1989 expire on January 1, 2036, and specifies that CDTFA may continue providing refunds and credits, among other activities.

There will certainly be many companies that have not paid tax in quite a while due to credit utilization and NOLs that will now be cash taxpayers for California. In addition, many taxpayers filed refund claims based on the Microsoft decision. It is most likely that these taxpayers will challenge the retroactive law change.

In addition, SB 175, a companion bill to the budget legislation, has been proposed that would modify and mitigate the limitations in SB 167. The proposed language would create a potential trigger to lift the suspensions in future tax years if the budget deficit recovers such that they are no longer necessary. Further, this bill would allow refundability of certain limited credits from the suspension period, though the language would require a specific election in each suspended year and spread the credits over five years following the suspension.

While there is much more to be said as to these changes, the manner in which the Legislature and governor have implemented these items gives rise to both uncertainty and opportunity for taxpayers. If you would like to have a discussion as to how these new laws will affect your organization, please contact one of our California experts listed below.


Josh Booth

Trisha Fortune

Raaj Kumar

Mark Nachbar

Gina Rodriquez

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at