BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 2408|
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THIRD READING
Bill No: AB 2408
Author: Skinner (D), et al.
Amended: 8/6/12 in Senate
Vote: 27 - Urgency
SENATE GOVERNANCE & FINANCE COMMITTEE : 5-3, 7/3/12
AYES: Wolk, DeSaulnier, Hernandez, Kehoe, Liu
NOES: Dutton, Fuller, La Malfa
NO VOTE RECORDED: Yee
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : Not relevant
SUBJECT : Taxation: deductions: net operating loss
carrybacks
SOURCE : California Tax Reform Association
DIGEST : This bill repeals net operating loss (NOL) carry
backs.
ANALYSIS : The Personal Income Tax Law and the
Corporation Tax Law allow individual and corporate
taxpayers to utilize NOLs and carryovers and carrybacks of
those losses for purposes of offsetting their individual
and corporate tax liabilities. Existing law allows NOLs
attributable to taxable years beginning on or after January
1, 2013, to be carrybacks to each of the preceding two
taxable years, as provided.
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This bill repeals NOL carry backs.
Background
When deductions exceed income for a single tax year,
taxpayers generate a "net operating loss," 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 10 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), Chapter 104,
Statutes of 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), Chapter 488, Statutes of 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
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
(Assembly Budget Committee), Chapter 763, Statutes of
2008). Congress then extended the two-year general NOL
carry back to five years for small businesses with losses
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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 (Senate Budget and Fiscal
Review Committee), Chapter 721, Statutes of 2010).
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/6/12)
California Tax Reform Association (source)
AFSCME
California Labor Federation
California Professional Firefighters
SEIU
OPPOSITION : (Verified 8/6/12)
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Advanced Medical Technology Association
BIOCOM
California Bankers Association
California Building Industry Association
California Business Properties Association
California Chamber of Commerce
California Manufacturing and Technology Association
California Newspaper Publishers Association
California Taxpayers Association
Council on State Taxation
National Federation of Independent Business
TechAmerica
ARGUMENTS IN SUPPORT : According to the author,
"Repealing the ability of a corporation to obtain an
anticipated tax refund is no different from - and in some
cases less serious than - the severe cuts and disruptions
many families, schools, and local governments face due to
the State's fiscal crisis. AB 2408 does not repeal the
loss carryforward law, which helps businesses match the
investments, losses, and profits of the business cycle with
the State's tax collection cycle."
ARGUMENTS IN OPPOSITION : The trade associations state
that the "carryback deduction is particularly critical for
new businesses that struggle with profitability during
their initial years, and need help to get off the ground."
They further state that " AB 2408 not only reverses the
2008 compromise just as the taxpayer's benefit from that
agreement begins to materialize, it reinforces with
employers that California's taxing environment is
unpredictable. Lack of predictability adds to risk,
increased risk adds to overall cost of doing business,
further hindering California's economic recovery."
AGB:k 8/8/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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