California Assembly Bill 85, signed on June 29, 2020, suspended net operating loss (NOL) deductions and capped business tax credits at $5 million per year as part of the state’s COVID-era budget response. The restrictions originally applied to tax years 2020 through 2022, but Senate Bill 113 later shortened the window to 2020 and 2021 only. If you carried losses or credits through those years, or you are now navigating the separate NOL suspension that runs from 2024 through 2026, the AB-85 rules still shape your carryover schedules.
The NOL Deduction Suspension
AB-85 blocked taxpayers from claiming NOL deductions for tax years beginning on or after January 1, 2020. Both corporate filers under the Corporation Tax Law and individuals under the Personal Income Tax Law were caught by the rule.1State of California Franchise Tax Board. AB 85 Amended June 10 2020 Losses from prior years still existed on the books; they just could not be used to reduce current taxable income while the suspension ran.
Smaller taxpayers were exempt. Corporations with California-source income under $1 million could still deduct NOLs. Individuals qualified for the exemption if either their net business income or their modified adjusted gross income was below $1 million. Net business income for this purpose covered trade or business income, rental activity, farming, and pass-through income from partnerships and S corporations, measured without the NOL deduction itself.2California Legislative Information. California Revenue and Taxation Code RTC 17276.23
Extended Carryover Periods
To keep taxpayers from permanently losing deductions, AB-85 extended the NOL carryover period on a sliding scale:
- Losses from before 2020 received three additional carryover years.
- Losses from tax year 2020 received two additional years.
- Losses from tax year 2021 received one additional year.
Businesses continued to compute and track losses during the suspension. They simply had to wait to apply them.1State of California Franchise Tax Board. AB 85 Amended June 10 2020
The $5 Million Business Credit Cap
AB-85 also limited the total business tax credits a taxpayer could claim in a single year to $5 million. The cap covered credits under both the Personal Income Tax Law and the Corporation Tax Law, including credits like the Research and Development credit.3California Legislative Information. California Revenue and Taxation Code 23036.3 For combined reporting groups, the $5 million ceiling applied at the group level rather than to each entity separately.1State of California Franchise Tax Board. AB 85 Amended June 10 2020
Some credits sat outside the cap. The Low Income Housing Credit was fully excluded, and amounts elected under the irrevocable credit-to-sales-tax transfer provisions for qualified motion picture credits were also excluded. Personal credits such as the earned income credit, renter’s credit, and dependent care credits were never business credits under the statute and were unaffected.3California Legislative Information. California Revenue and Taxation Code 23036.3
Credits blocked by the cap were not lost. They carried forward, and the carryforward period was extended by the number of years the credit was disallowed.3California Legislative Information. California Revenue and Taxation Code 23036.3
SB 113 Ended Both Restrictions a Year Early
Senate Bill 113, signed in February 2022, ended the NOL suspension and the credit cap one year ahead of schedule. Both rules applied only to tax years 2020 and 2021, and the amended text of Revenue and Taxation Code Section 17276.23 sets the NOL cutoff at “before January 1, 2022.”2California Legislative Information. California Revenue and Taxation Code RTC 17276.23 For tax year 2022, businesses could resume full NOL deductions and claim credits above the $5 million line.
How AB-85 Connects to the 2024–2026 Suspension
California enacted a new NOL suspension for tax years 2024 through 2026. It is a separate law tied to later budget cycles, not an extension of AB-85. The mechanics track the earlier rule: taxpayers with $1 million or more in the relevant income measure cannot claim NOL deductions, and the carryover period is extended for each blocked year. Disaster loss carryovers are not affected by the current suspension.4State of California Franchise Tax Board. Net Operating Loss
The interaction matters. A company that sat out the 2020 and 2021 suspension under AB-85, then deducted freely in 2022 and 2023, is now blocked again. Losses can accumulate multiple layers of carryover extensions: the AB-85 extensions still apply to pre-2020, 2020, and 2021 losses, and the new suspension adds its own extensions on top of them.
What to Check Now
Verify your carryover schedules. If you filed 2020 or 2021 returns without deducting NOLs, or with credits limited to $5 million, confirm that your current schedules reflect the correct extended expiration dates for each loss year and each blocked credit. The Franchise Tax Board issued FTB 763B notices during the AB-85 transition, so businesses that received one should confirm the underlying issue was resolved.5State of California Franchise Tax Board. FTB 763B Notices Issued as a Result of AB 85 System Changes
Recheck the $1 million threshold each year under the current suspension. Income moves, and a business that qualified for the small-business exemption in one year may not the next. Under the personal income tax rules, meeting either the net business income test or the modified AGI test is enough to keep the deduction available, so track them separately.4State of California Franchise Tax Board. Net Operating Loss
For businesses carrying layered NOLs, map them out by origin year. A pre-2020 loss can carry AB-85 extensions plus new extensions from the 2024–2026 suspension, and getting the expiration date wrong is the kind of error that surfaces during an audit.