SB 167 – Taxation / Revenues Budget Trailer Bill

Amended on June 10 (but “in print” on the Internet on June 8), Assembly Bill 167 and Senate Bill 167 were amended to be the taxation and revenues budget trailer bill in the California Legislature. SB 167 (Senate Budget & Fiscal Review Committee) was ultimately sent to the Desk of Governor Gavin Newsom and he signed the measure on June 27 as part of the 2024-25 California State Budget.

While the Governor and Legislature adopted similar proposals just four years ago at the outset of the pandemic, SB 167 contains significant, temporary tax increases on California’s business community. The net operating loss deduction has historically been suspended for two successive years during poor economic times, roughly every decade or so, including in 2020, 2010, and the early 2000s. The limit on businesses using their earned tax credits is a new proposal, having only been adopted previously in 2020.

Although these two revenue-raising proposals would increase state revenues considerably, they are temporary for up to three years because they are set for a definitive period of time and they could be fully restored to existing law if sufficient revenues are received by the state in next year’s May Revise.

While temporary, the NOL carryover period would be extended for three years, in theory allowing the suspended deductions to be utilized in later years. The same would apply to the credit limit, allowing businesses to utilize those credits in three future years. In the Governor’s May Budget Revision, the following explanation is provided:

Net Operating Losses (NOL) Suspension and Limitation of Credits to $5 million— Suspending the carryover NOL tax deduction for businesses with California income over $1 million and limiting business credit usage to $5 million for tax years 2025, 2026, and 2027, with a trigger to restore if sufficient revenues are determined to be available in the 2025-26 May Revision. The credit limitation does not apply to the Low-Income Housing and Pass-through Entity Elective tax credits. Both the NOLs and credits carryover periods would be extended by three years. This solution replaces the Governor’s Budget proposal to limit NOLs to 80 percent of taxable income.

In addition, the May Revise contains a proposal to reverse long-standing California law that was applied in an Office of Tax Appeals (OTA) case that was unanimously rendered just over three months ago. By “clarifying” the law, the proposal would actually change existing law and would result in a significant tax increase for California businesses by denying certain multinational corporations from obtaining a refund due under existing state law.

The proposed trailer bill language specifies that the changes in law are applicable to tax years “before and after the effective date of the law changes.” Separately listed in the May Revise is the following:

The May Revision includes the following new proposals: • Apportionment Factor—Clarification of existing law that when a corporation receives income that is excluded from taxable business income, it must exclude this income from its apportionment factor. This proposal is projected to increase General Fund revenues by $216 million in the budget window.

As opposed to the May Revise’s proposed prospective application of the NOL suspension and tax credit limitation, the joint legislative budget package would make the NOL deduction suspension and tax credit limitation proposals retroactive to January 1, 2024. The other tax proposals from the Governor’s January 10 budget and May Revise are also adopted. From the Joint Legislative Budget Plan:

Governor’s Proposals. Approves the Governor’s proposal to suspend Net Operating Loss deductions and cap various business tax credits for three years. But, the Legislature’s Plan starts the three year period earlier than the Governor so that the suspension and cap will be in place for tax years 2024, 2025, and 2026. The Legislature’s Plan also includes several other tax and fee proposals advanced by the Governor, including changes to the MCO tax, changes to oil and gas-related taxation, changes to corporate tax apportionment law, and others.

While these proposals were heard in the Senate and Assembly Budget subcommittees, they were not considered by the respective Assembly and Senate Revenue and Taxation Committees.

Section 1 of the bill amends Gov’t Code Section 11340.9 to exempt from the APA rulemaking procedures to a legal ruling of counsel issued by the CDTFA.

Section 2 of the bill amends H&S Code Section 25299.81 to make technical changes regarding payment of administrative costs to CDTFA for administering a fee program.

Section 3 of the bill repeals Public Resources Code Section 42882 relating to using SBE expertise for a fee program.

Section 4 of the bill amends Public Resources Code Section 42885 relating to the tire fee recycling program and requiring CDTFA to collect the fee and expand the definition of “feepayer.”

Section 5 of the bill amends Public Resources Code Section 42885 and makes its provisions operative on January 1, 2034.

Section 6 of the bill amends Public Resources Code Section 42886.1 to make technical changes.

Section 7 of the bill amends Public Resources Code Section 42889 to require all monies derived from the California Tire Fee to be deposited with CDTFA.

Section 8 of the bill amends Public Resources Code Section 42889 and makes its provisions operative on January 1, 2034.

Section 9 of the bill amends Revenue and Taxation Code Section 6055 to define “retailer” for purposes of the bad debt deduction, prior to January 1, 2025. The term includes any entity affiliated with the retailer under federal law. A retailer is not entitled to a deduction after January 1, 2025. This section is repealed on January 1, 2028.

Section 10 of the bill adds Revenue and Taxation Code Section 6055 to relieve a retailer from liability for sales tax that became due and payable, insofar as the measure of the tax is represented by accounts that have been found to be worthless and charged off for income tax purposes by the retailer. In addition, a retailer that has previously paid the tax may take as a deduction the amount found worthless and charged off by the retailer. If these accounts are thereafter collected by the retailer, the amount collected is included in the first return filed after the collection and the tax must be paid with the return. This section is operative on January 1, 2028.

Section 11 of the bill amends Revenue and Taxation Code Section 6203.5 to define “retailer” for purposes of the bad debt deduction, prior to January 1, 2025. The term includes any entity affiliated with the retailer under federal law. A retailer is not entitled to a deduction after January 1, 2025. This section is repealed on January 1, 2028.

Section 12 of the bill adds Revenue and Taxation Code Section 6203.5 to relieve a retailer from liability for sales tax that became due and payable, insofar as the measure of the tax is represented by accounts that have been found to be worthless and charged off for income tax purposes by the retailer. In addition, a retailer that has previously paid the tax may take as a deduction the amount found worthless and charged off by the retailer. If these accounts are thereafter collected by the retailer, the amount collected is included in the first return filed after the collection and the tax must be paid with the return. This section is operative on January 1, 2028.

Section 13 of the bill amends Revenue and Taxation Code Section 6902.5 to cap at $5 million the amounts for which an irrevocable election is made in lieu of tax credits allowed for TV and motion picture production in this state. The cap begins January 1, 2024 and ends on December 31, 2026. If the claimant has not exhausted the excess credit amount, or assigned portion, the claimant may offset the remaining excess credit amount, or assigned portion, against the qualified sales and use taxes imposed during the reporting periods in the five years following and including the reporting period beginning on and after January 1, 2027. A “claimant” includes a qualified taxpayer together with its affiliates.

Section 14 of the bill amends Revenue and Taxation Code Section 7103 relating to the historic venue restoration sales tax credit. It is to apply for each confirmed historic venue. After enactment of the annual Budget Act, the Department of Finance is required, for each confirmed historic venue located within the geographic boundaries of a city or county, to report to the Controller the amounts to be allocated from the fund to each city and county. The allocation to each city and county is in proportion to the taxable sales derived from qualified events at each confirmed historic venue identified by that city or county.

Section 15 of the bill adds Revenue and Taxation Code Section 17039.4 to provide that, for taxpayers not required to be included in a combined report, for each taxable year beginning on or after January 1, 2024, and before January 1, 2027, the total of all business credits otherwise allowable cannot reduce the “net tax” by more than $5 million. This section lists 12 allowable credits that are subject to the cap. The amount above $5 million remains a credit carryover and the carryover period is extended based upon years they are capped.

Section 16 of the bill amends Revenue and Taxation Code Section 17052.1 to require the FTB to calculate a graduated reduction amount for a qualified taxpayer with earned income of $1 or more in excess of the maximum earned income that results in a credit amount greater than $0, the amount of the credit under this section is equal to zero. For taxable years beginning on or after January 1, 2024, the graduated reduction amount calculated will be $20.

Section 17 of the bill amends Revenue and Taxation Code Section 17052.2 to require the FTB to calculate a graduated reduction amount for a qualified taxpayer with earned income of $1 or more in excess of the maximum earned income that results in a credit amount greater than $0, the amount of the credit under this section is equal to zero. For taxable years beginning on or after January 1, 2024, the graduated reduction amount calculated will be $20.

Section 18 of the bill amends Revenue and Taxation Code Section 17052.8 to repeal it on December 1, 2024, after disallowing any credit beginning January 1, 2024 for a qualified enhanced oil recovery project.

Section 19 of the bill amends Revenue and Taxation Code Section 17209 to extend from January 1, 2025 to January 1, 2030 a provision of the IRC relating to expenditures in connection with the illegal sale of drugs.

Section 20 of the bill amends Revenue and Taxation Code Section 17260 to make the IRC relating to intangible drilling and development costs for oil and gas wells not apply for costs paid or incurred after January 1, 2024.

Section 21 of the bill amends Revenue and Taxation Code Section 17275.5 to apply the IRC relating to certain qualified conservation contributions to apply for contribution made after January 1, 2024.

Section 22 of the bill adds Revenue and Taxation Code Section 17275.6 relating to contributions made after January 1, 2024 for qualified conservation contributions by certain passthrough entities. 

Section 23 of the bill adds Revenue and Taxation Code Section 17276.24 regarding net operating losses. It defines the terms “business income,” “modified adjusted gross income,” and “passthrough entity.” The NOL deduction is not allowed for taxes years from January 1, 2024 through December 31, 2026. The NOL carryover period is extended by the number of years it was suspended. This does not apply to businesses with net income of less than $1 million.

Section 24 of the bill amends Revenue and Taxation Code Section 17681 and provides that, for taxable years beginning January 1, 2024, specified sections of the Internal Revenue Code do not apply in the case of oil shale, coal, and limitations on the percentage depletion of oil and gas wells.

Section 25 of the bill repeals Revenue and Taxation Code Section 17681.3 relating to certain refiner exclusions.

Section 26 of the bill repeals Revenue and Taxation Code Section 17681.6 relating to the temporary suspension of the taxable income limit for marginal production.

Section 27 of the bill amends Revenue and Taxation Code Section 18416.5 to repeal a subdivision that was being repealed on January 1, 2025.

Section 28 of the bill amends Revenue and Taxation Code Section 18572 requiring the postponement of certain tax-related deadlines to be determined by the Director of Finance. It adds definitions for “additional relief period,” “federal postponement period,” “impacted taxpayer,” “state postponement period,” and “supporting documentation.”

Section 29 of the bill amends Revenue and Taxation Code Section 19164 relating to accuracy-related penalties and provides that amendments to the IRC apply to returns filed on or after January 1, 2024.

Section 30 of the bill amends Revenue and Taxation Code Section 19187 to make technical changes regarding penalty notices. It applies for additions to tax imposed on or after January 1, 2024.

Section 31 of the bill amends Revenue and Taxation Code Section 19378 to repeal it effective June 30, 2024 dealing with FTB contracting costs.

Section 32 of the bill amends Revenue and Taxation Code Section 23036 to extend the tax credit for the new advanced strategic aircraft from January 1, 2026 to January 1, 2031.

Section 33 of the bill adds Revenue and Taxation Code Section 23036.4 to provide that, for taxpayers not required to be included in a combined report, for each taxable year beginning on or after January 1, 2024, and before January 1, 2027, the total of all business credits otherwise allowable cannot reduce the “net tax” by more than $5 million. This section lists 12 allowable credits that are subject to the cap. The amount above $5 million remains a credit carryover and the carryover period is extended based upon years they are capped.

Section 34 of the bill amends Revenue and Taxation Code Section 23604 to repeal it on December 1, 2024, after disallowing any credit beginning January 1, 2024 for a qualified enhanced oil recovery project.

Section 35 of the bill amends Revenue and Taxation Code Section 24357 relating to contributions made after January 1, 2024 for qualified conservation contributions by certain passthrough entities. 

Section 36 of the bill adds Revenue and Taxation Code Section 24416.24 to disallow a net operating loss for any taxable year beginning January 1, 2024 through December 31, 2026.

The NOL carryover period is extended by the number of years it was suspended. This does not apply to a taxpayer with income of less than $1 million.

Section 37 of the bill repeals Revenue and Taxation Code Section 24423 relating to provisions granting options to deduct as expenses the costs of intangible drilling and development of oil and gas wells.

Section 38 of the bill provides that, for taxable years beginning January 1, 2024, specified sections of the Internal Revenue Code do not apply in the case of oil shale, coal, and limitations on the percentage depletion of oil and gas wells.

Section 39 of the bill repeals Revenue and Taxation Code Section 24831.3 relating to certain refiners.

Section 40 of the bill repeals Revenue and Taxation Code Section 24831.6 relating to the temporary suspension of taxable income limits regarding marginal production.

Section 41 of the bill adds Revenue and Taxation Code Section 25128.9 to first make six legislative findings and declarations related to the allocation and apportionment of income of taxpayers having income from business activities in and out of California. It states that this section is declaratory of existing law and that it applies to current and former formulas. It states that income or loss not included in net income subject to apportionment is excluded from the apportionment formula. The term “net income” is defined. The FTB may adopt regulations to carry out this section, which are not subject to the APA process. This section applies to prior, current, and future tax years.

Section 42 of the bill amends Revenue and Taxation Code Section 50108 to make technical changes related to fees imposed under the Health and Safety Code.

Section 43 of the bill amends Welfare and Institutions Code Section 8163 to require third-party vendor payments to be made to the Franchise Tax Board for deposit in the state’s General Fund.

Section 44 of the bill provides a statement of legislative intent to overrule a State Board of Equalization Memorandum Opinion issued December 14, 2000.

Section 45 of the bill provides three main statements of legislative intent. First, taxpayers subject to the credit limitation can utilize their credits after the limitation period to receive a refund. Second, allow an electing taxpayer to claim credits at a specified time. Third, include provisions to prevent overstatement of refundable tax credits.

Section 46 of the bill provides a severability clause.

Section 47 of the bill provides that no reimbursement is required to local agencies or school districts.

Section 48 of the bill provides that this bill is a budget trailer bill and takes effect immediately.