California: Additional Tax-Related Budget Provisions Provide Some Relief After the $18 Billion Tax Increase

As a follow up  to our June 27, 2024, tax development, which discusses tax-related provisions enacted as part of California’s 2024-25 budget bill (SB 167, Ch. 24-34), Governor Newsom signed another tax-related budget bill: SB 175 (Ch. 24-41). However, unlike SB 167, which imposes an $18 billion tax increase, including limiting tax credits to $5 million for the 2024 through 2026 taxable year, SB 175 provides some relief.

For each of the 2024, 2025, and 2026 taxable years, SB 175 allows a taxpayer to make an irrevocable annual election to receive a refundable tax credit equal to the amount of credits in excess of the $5 million cap. A taxpayer who makes the election may claim an annual refundable tax credit equal to 20% of the qualified credits that would have otherwise been available to the taxpayer but for the limitation amount. The 20% credit must be taken over five years, beginning the third taxable year after the election is made. Thus, the entire credit will be realized over a five-year period. As a bonus, the refundable credit can reduce regular tax below tentative minimum tax.

Triggers for Tax-Credit Limitation and Net Operating Loss

SB 175 also includes a trigger to end the tax credit limitation and restore the net operating loss deduction prior to 2026. The trigger would turn on whether the director of the Department of Finance determines that “General Fund money over the multiyear forecast is sufficient without the revenue impact of the net operating loss suspension and credit limitation.”

First-Year Tax Exemption Repealed for New LLCs, LPs, and LLPs 

Finally, California’s main budget bill (AB 107, Ch. 24-22) allocated money to fund California’s “first-year-free” rule, so LLCs, LPs, and LLPs doing business in California could continue to take advantage of the exemption from the $800 annual tax during their first taxable year of business. However, the December 31, 2023, sunset date of the exemption itself was not extended. Therefore, there is no exemption from the $800 annual tax for LLCs, LPs, and LLPs that organize or register with the California Secretary of State’s Office in 2024. The first-year exemption for corporations was not subject and remains in effect, as it has no sunset day. Also, the “15-day” rule remains in effect for LLCs, LPs, LLPs, and corporations that did not do business in California during the taxable year and if the taxable year was 15 days or less. 

Please contact our Ryan tax professionals for information as to how these changes impact you. 

TECHNICAL INFORMATION CONTACTS: 

Josh Booth
Principal
Ryan
916.790.3772
josh.booth@ryan.com

Gina Rodriquez
Principal
Ryan
916.414.0400
gina.rodriquez@ryan.com

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 info@ryan.com.