AB 1105: Sale of Net Operating Losses

Assembly Bill 1105 (Petrie-Norris) was recently amended to provide for the sale of net operating losses (NOLs). AB 1105 would amend Revenue and Taxation Code Sections 17276 and 24416, as well as add Revenue and Taxation Code Sections 17137 and 24309.4. The purpose of the bill is to allow a startup innovator to sell a net operating loss to an unrelated taxpayer.

Section 1 of the bill would add Revenue and Taxation Code Section 17137 to exclude from gross income any amount received by a startup innovator for the sale of a net operating loss for tax years beginning January 1, 2024. The goal of this income exclusion is to promote competition and reduce oligopolistic consolidation in California’s STEM sector by enabling innovative startups to survive periods of net operating loss.

The Franchise Tax Board would be required to annually provide a report to the Legislature detailing the number of taxpayers that have sold net operating losses, and the total dollar value of net operating losses sold.

Section 2 of the bill would amend Revenue and Taxation Code Section 17276 (under the Personal Income Tax Law) to authorize a startup innovator to sell a net operating loss to a taxpayer that is not related to the startup innovator, which must satisfy three criteria. In addition, a sale of NOLs must be for at least 80 percent of the value of the NOLs transferred.

A startup innovator may not sell more than $20 million worth of NOLs during the lifetime of the business. The FTB would be required to establish a program for startup innovators to apply for the ability to sell NOLs. And, the FTB may require a startup innovator to pay a fee to participate in the program.

A purchaser of a net operating loss may utilize the NOL in a closed taxable year only upon appropriation by the Legislature for this purpose. A purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the NOL.

Section 3 of the bill would add Revenue and Taxation Code Section 24309.4 to exclude from gross income any amount received by a startup innovator for the sale of a net operating loss for tax years beginning January 1, 2024.

Section 4 of the bill would amend Revenue and Taxation Code Section 24416 (under the Corporation Tax Law) to authorize a startup innovator to sell a net operating loss to a taxpayer that is not related to the startup innovator, which must satisfy three criteria. In addition, a sale of NOLs must be for at least 80 percent of the value of the NOLs transferred.

A startup innovator may not sell more than $20 million worth of NOLs during the lifetime of the business. The FTB would be required to establish a program for startup innovators to apply for the ability to sell NOLs. And, the FTB may require a startup innovator to pay a fee to participate in the program.

A purchaser of a net operating loss may utilize the NOL in a closed taxable year only upon appropriation by the Legislature for this purpose. A purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the NOL.

Section 5 of the bill would set forth legislative findings and declarations that the ability of innovative startups to transfer NOLs for value serves the public purpose of promoting competition and reducing oligopolistic consolidation in the science, technology, engineering, and math (STEM) sector of California’s economy and does not constitute a gift of public funds.