How AB 85 May Impact California Business

During the 2020-21 legislative session, Governor Gavin Newsome signed Assembly Bill 85 (AB 85) into law. In doing so, he introduced a number of changes to the California Revenue and Taxation Code, such as:

Franchise Tax Exemptions

California typically imposes a minimum franchise tax fee of $800 on every organization that conducts business within its borders. However, for many years, corporations that incorporate in the Golden State have received an exemption from this charge in their first taxable year.

AB 85 extends this tax exemption to other business entities. The law now states that any LLC, LLP, or LP that registers with the California Secretary of State between January 1, 2021, and December 31, 2023, is exempt from the $800 minimum annual franchise tax for its first taxable year.

These organizations must now begin paying the state franchise tax fee in their second year and continue to do so until they are formally dissolved.

If you are not sure whether your organization is eligible to receive the tax exemption, you would be wise to speak to your California business lawyer or accountant before filing your annual tax return.

Tax Credit Limitations

AB 85 restricts the use of business incentive tax credits for taxable years 2020, 2021, and 2022. It explains that credits (including carryover credits) may not reduce an organization’s tax obligations by more than five million dollars.

This new rule applies to a wide range of tax credits, including:

  • New Employment Credits
  • California Competes Credits
  • Research Credits
  • Jobs Tax Credits
  • Oil Recovery Credits
  • Prison Inmate Labor Credits
  • Natural Preservation Credits

Any tax credits barred by the five million dollar limit “shall remain a credit carryover amount” with the carryover period “increased by the number of taxable years the credit or any portion thereof was not allowed.”

If you believe you may be affected by the tax credit limit, you may want to talk to a knowledgeable business attorney in San Diego. They will be able to help you plan around the restrictions to ensure your company does not run into any cash flow issues.

Suspension of Net Operating Losses

AB 85 also suspends the use of net operating losses for the taxable years 2020, 2021, and 2022. This new tax regulation applies to any individual or corporation with a taxable income of more than one million dollars.

For any net operating losses for which a deduction is denied as a result of AB 85, the carryover period will be extended as follows:

  • Losses incurred during 2021 will receive a one-year extension
  • Losses incurred during 2022 will receive a two-year extension
  • Losses incurred during 2023 will receive a three-year extension

The new rule is similar to the net operating loss suspensions in effect in California from 2008 to 2011.

Your Knowledgeable Business Attorney in San Diego

Would you like to learn more about the impact AB 85 could have on your organization? If so, please do not hesitate to reach out to an experienced California business lawyer at the Semanchik Law Group. We will be happy to answer any questions you might have.

To arrange a consultation, all you need to do is give us a call at (619) 535-1811 or fill out our online contact form. We look forward to assisting you!