BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2408 HEARING: 7/3/12
AUTHOR: Skinner FISCAL: Yes
VERSION: 6/13/12 TAX LEVY: Yes
CONSULTANT: Grinnell
NET OPERATING LOSS CARRY BACKS
Repeals Net Operating Loss Carry Backs
Background and Existing Law
When deductions exceed income for a single tax year,
taxpayers generate a "net operating loss," (NOL) which can
generally be used to reduce federal of state income subject
to tax in past years to generate a refund, or in the future
to reduce income subject to tax. Generally, only expenses
from a trade or business can be used to generate NOLs,
although exceptions exist for casualty and theft losses,
among others. NOLs are generally considered to be part of
a sound tax system because they allow a firm that has
revenues, expenses, and profits that vary from year to year
to only pay tax on its profitability over its total life
span instead of in taxable years, which only represents a
firm's profitability over 365 days.
In the past for state taxes, taxpayers could only use NOLs
to reduce income in the next ten taxable years by specified
percentages. The Legislature increased the long-standing
50% to 55% for the 2001 and 2002 taxable years, and 60% for
taxable years thereafter (AB 1774, Lempert, 2000).
However, two years later, the Legislature first suspended
NOLs in exchange for more generous NOL treatment in the
future, when it increased the value of the NOL for
taxpayers from 60% to 100% for taxable years after 2004 in
exchange for suspending NOLs for all taxpayers in the 2002
and 2003 taxable years (AB 2065, Oropeza, 2002).
Until 2008, taxpayers could only apply NOLs as a deduction
against income realized in future taxable years, called a
"carry forward," unlike federal law, which allows for
"carry backs." However, the Legislature for the second
time enhanced NOL treatment in exchange for the revenue
AB 2408 - 6/13/12 -- Page 2
increase resulting from prohibiting taxpayers from using
NOLs in the 2008 and 2009 tax years by extending carry
forwards from ten to 20 years, and authorizing NOL
"carrybacks" beginning in the 2011 taxable year (AB 1452,
Committee on Budget, 2008). Congress then extended the
two-year general NOL carry back to five years for small
businesses with losses in 2008 in the American Recovery and
Reinvestment Act, signed in February, 2009. Congress then
allowed almost the same treatment for all businesses for
2009 losses in the Worker, Homeownership and Business
Assistance Act, signed in November, 2009, at an estimated
cost of $33 billion.
A carry back allows a taxpayer to apply a loss in the
current taxable year to taxes paid in previous years, and
generate a refund as a result. AB 1452 phased in carry
backs in limited percentages for the first two years, then
fully implement 100% two-year carry backs in the third
year:
For NOLs generated in the 2011 taxable year,
taxpayers may carry back 50% of the loss to the 2009
and 2010 taxable years.
For NOLs generated in the 2012 taxable year,
taxpayers may carry back 75% of the loss to the 2010
and 2011 taxable years.
For NOLs generated in the 2013 taxable year and
thereafter, taxpayers may carry back 100% of the loss
to the 2011 taxable year and thereafter.
Facing another difficult budget, the Legislature again
suspended NOLs for the 2010 and 2011 taxable years, and
delayed the above listed ability for taxpayers to carry
back losses for two years (SB 858, Committee on Budget,
2010).
Proposed Law
Assembly Bill 2408 repeals net operating loss carry backs.
State Revenue Impact
Pending.
AB 2408 - 6/13/12 -- Page 3
Comments
1. Purpose of the bill . According to the author, "AB
2408 would eliminate an unfair corporate tax break called
the "loss carryback," which allows companies to
retroactively apply net operating losses to a preceding
year's income in order to mask profits present in that
previous year. The corporate tax break would raid revenue
from California's schools, colleges, parks and public
safety. California could stand to lose more than $250 to
$400 million in direct refund checks to corporations taking
advantage of the state's tax code."
2. Carried away ? Opponents state that NOL carry backs are
an important benefit for cash-strapped small businesses
that need tax refunds to pay bills, meet payroll, and make
business investments. Without the cash, some of these
firms would perish. Opponents further argue that
legislatively revoking a tax benefit that is yet to take
effect increases uncertainty, which hurts economic growth.
The Committee may wish to consider whether AB 2408 causes
uncertainty, especially for smaller firms.
3. One of these kids is not like the other . While part of
federal law for quite some time, NOL carry backs give rise
to different considerations because they operate in
fundamentally different ways than other tax incentives.
First, carry backs are an efficient way to provide economic
stimulus through the tax system because they allow
taxpayers to quickly obtain cash in the form of refunds of
previous taxes paid; however, not all taxpayers can make us
of carry backs because the benefit is contingent upon the
specific years in which they generate profits and losses.
Consider the taxpayer that had $100 in profit and paid
$8.84 in tax (at the 8.84% corporate tax rate) in the 2010
taxable year, but incurred losses of $25 in 2011 and 2012.
Before SB 858's two-year delay, the taxpayer could have
carried back 75% of the 2012 loss ($18.75), and 50% of the
2011 loss ($12.50) to the 2010 year. In such a case, the
taxpayer amends their 2010 return, adds $31.25 to their
expenses for the 2010 year to reduce taxable income to
$68.25, generating a tax refund of $2.77, or more than a
quarter of taxes paid ($100 - $31.25 = $68.75 x 8.84% =
$6.07 in amended 2010 tax) - $8.84 in original 2010 tax =
$2.77). After SB 858, carry backs don't immediately
benefit this taxpayer because he or she didn't pay any tax
AB 2408 - 6/13/12 -- Page 4
in 2011 and 2012. Second, carry backs are available to all
businesses, and are not contingent on a specified kind of
investment, unlike other benefits offered by state law such
as research and development credits. Carry backs also
create great uncertainty for government; taxes previously
collected and spent must be refunded, necessitating other
cuts in public services or additional revenues, and the
overall fiscal costs are likely to escalate as the economy
worsens: when firms incur more losses, they claim more in
carry backs, as firms can immediately use NOLs to get cash
back from the government instead of waiting to use them to
reduce profits in future taxable years. Lastly, critics
state that NOL carry backs largely benefit bigger firms
that have made large profits, then take losses.
Assembly Actions
Not relevant to this version of the bill.
Support and Opposition (6/28/12)
Support : California Tax Reform Association.
Opposition : California Chamber of Commerce, California
Taxpayers Association, California Building Industry
Association, California Manufacturing and Technology
Association, Council on State Taxation, National Federation
of Independent Business.