BILL ANALYSIS
AB 135
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Date of Hearing: March 26, 2007
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles Calderon, Chair
AB 135 (Houston) - As Introduced: January 16, 2007
Majority vote. Tax Levy. Fiscal Committee.
SUBJECT : Personal income and corporation tax: Net operating
loss: Carryover period
SUMMARY : Extends the carryover period for all net operating
losses (NOL) to each of the 20 taxable years following the
taxable year of loss. Specifically, this bill applies to any
NOL attributable to a taxable year beginning on or after January
1, 2007.
EXISTING LAW requires taxpayers to account for their income and
expenses on an annual basis. A NOL occurs when the taxpayer's
expenses exceed the reportable income for the tax year. Both
federal and state law allows taxpayers to carryforward NOLs for
use in future taxable years. The carryforward period varies
depending upon the type of taxpayer or the taxpayer's income.
Currently, California allows the following NOL carryforward
periods:
--------------------------------------------------------------
| Type of NOL | California NOL Carryover |
| | Period |
|-------------------------------+------------------------------|
|General NOL (post-1999 losses) | 10 years |
|-------------------------------+------------------------------|
|New Business NOL | 10 years |
|-------------------------------+------------------------------|
|Eligible Small Business NOL | 10 years |
|-------------------------------+------------------------------|
|Specified Disaster Losses | 15 years |
|(post-2003 losses) | |
|-------------------------------+------------------------------|
|Pierce's Disease NOL | 9 years |
|(2000-2002) | |
|-------------------------------+------------------------------|
|Economic Development Area NOL |15 |
| |years |
AB 135
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FISCAL EFFECT : Franchise Tax Board (FTB) staff estimate of
economic impact reflects that the revenue effect from any NOLs
arising after the effective date of this bill will not be
realized until the 2017-18 fiscal year (FY), at the earliest.
Based on company-level data and micro-simulations model, FTB
staff estimate that $600 million in NOLs generated in tax year
2007 would be used in FY 2017-18.
Proposition 98 Fiscal Effect : Committee staff estimate a loss
in funding for K-14 schools of $324 million in FY 2017-18, using
allocation percentages for K-14 schools expected for the 2007-08
FY.
COMMENTS :
1)The author states that, although most taxpayers can use NOLs
during the 10-year carryover period, many industries have very
long development times. According to Assemblymember Houston,
"As California is regarded as the birthplace of the
innovation, it is all the more critical to ensure a healthy
environment in which companies may thrive and continue to
contribute to the state's economy. By allowing these
companies to deduct losses over 20 years, we will allow these
fledgling companies to invest in people, and to provide
research and advancements for years to come."
2)Proponents state that this bill brings the state into closer
conformity with federal law and will make California more
attractive for investments purposes. An extended carryover
period allows businesses to better manage their tax liability,
particularly when the business experiences spikes and valleys
in profit and losses. Proponents assert that permitting an
extension of the NOL is good tax policy and properly addresses
the real economic activity of many businesses, particularly
small, start-up companies that often endure several years of
investment expenditures (product development) before they
begin to recognize actual profits.
3)Opponents state that there is no discernible purpose to a
20-year carryforward period, asserting that no investor will
make a decision based upon losses lasting two decades.
Further, opponents state that the NOL carryover can be
destabilizing to the budget as the result of recession and
AB 135
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argue that there is no reason that the NOL carryover should be
allowed to contribute to instability so far into the future.
4)FTB staff identify technical considerations with this bill and
suggest that this bill amend existing NOL provisions to extend
the NOL carryforward period rather than creating a generic
provision that overwrites current law, for consistency,
clarity, and ease of use.
5)Committee staff note that there have been numerous bills
introduced that cause full conformity to federal rules
applicable to NOLs.
REGISTERED SUPPORT / OPPOSITION :
Support
California Chamber of Commerce
California Taxpayers' Association
Opposition
American Federation of State, County and Municipal Employees,
AFL-CIO
California State Employees Association
California Tax Reform Association
Analysis Prepared by : Kimberly Bott / REV. & TAX. / (916)
319-2098