On May 14th, California Governor Gavin Newsom issued his proposed May revision to the state budget for fiscal year 2020-21. The budget proposal included two revenue-raising income tax measures, applicable for tax years 2020 through 2022: (1) limiting the amount of business tax credits a taxpayer can use to $5 million annually, and (2) suspending the net operating loss deduction. These tax proposals are estimated to raise $9.2 billion over the next three years.

On May 24th, the California Department of Finance released a proposed trailer bill, which, if enacted, would implement the Governor’s budget proposal to limit annual usage of business tax credits. The proposed bill provides that for taxpayers not required to be included in a combined report, the total of all allowable tax credits may not reduce tax by more than $5 million annually for each taxable year from 2020 through 2022. Similarly, for taxpayers required to be included in a combined report, the total of all allowable tax credits for all members of the combined report may not reduce the aggregate tax of all members by more than $5 million annually for the same period.

The proposed bill would limit usage of a number of business tax credits, including:

  • Research and Development Tax Credit (Cal. Rev. & Tax Code Section (Section) 23609)
  • Jobs Tax Credit (Section 23621)
  • GO-BIZ California Competes Credit (Section 23689)
  • State Low-Income Housing Tax Credit (Section 23610.5)
  • New Employment Credit (Section 23626)
  • Motion Picture Production Credit (Section 23685)
  • New Motion Picture Production Credit (Section 23695)
  • Expenditures for the Production of a Qualified Motion Picture (Section 23698)

Tax credits which would otherwise be allowable during a taxable year but are limited by the $5 million cap will remain a credit carryover. The carryover period is extended by the number of tax years the credit is not allowed due to the $5 million cap.